Kinder Morgan, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless otherwise stated, financial figures are in millions of dollars. Kinder Morgan operates approximately 84,000 miles of pipelines and 180 terminals; its businesses include natural gas pipelines, CO2, terminals, products pipelines and Kinder Morgan Canada.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,330 | $3,707 | $9,669 | $10,767 |
| Operating income | $882 | $721 | $2,638 | $2,691 |
| Net income (loss) | $(183) | $183 | $506 | $944 |
| Net income (loss) available to common shareholders | $(227) | $186 | $382 | $948 |
| Basic earnings (loss) per share | $(0.10) | $0.08 | $0.17 | $0.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3,495 | $3,507 |
| Distributable cash flow (DCF), non-GAAP | $1,081 | $1,129 | $3,364 | $3,466 |
| DCF per common share | $0.48 | $0.51 | $1.50 | $1.58 |
Operating margin was approximately 26.5% in Q3 2016 versus 19.4% a year earlier, and 27.3% for the first nine months versus 25.0%. The quarterly net loss included a $350 million noncash impairment of the MEP equity investment and unusually high income tax expense; the nine-month results also included substantial project, asset and investment write-offs.
- Cash flow and investment: Nine-month operating cash flow was nearly unchanged year over year. Investing used $1,047 million, including $2,109 million of capital expenditures, partly offset by $1,402 million from the SNG interest sale. Financing used $2,324 million.
- Debt and liquidity: Debt principal was $39,752 million at September 30, excluding $1,710 million of fair-value adjustments. Cash was $357 million; the current portion of debt was $2,944 million. The company reported $4,832 million available on its $5 billion revolving facility, net of letters of credit. Working capital was negative $2,681 million.
- Dividends: Common dividends declared were $0.125 per share for Q3, versus $0.51 a year earlier. Management expected 2016 common dividends of $0.50 per share. Preferred stock carries a 9.75% annual dividend rate.
Changes and business performance
Revenue fell about 10% in both the quarter and year-to-date periods, mainly reflecting lower commodity prices and related sales, lower CO2 activity, and changes in consolidated operations. Operating income rose in Q3 despite lower revenue, while net income available to common shareholders turned negative. The 2016 results include preferred dividends not present in the prior-year comparison.
- Natural Gas Pipelines: Segment EBDA before certain items was $957 million in Q3, down 2%; nine-month EBDA was $3,045 million, up 1%. Stronger Tennessee Gas Pipeline and Hiland results were offset by lower volumes, contract expirations and the partial SNG divestiture. Reported Q3 EBDA was reduced by a $350 million MEP impairment and other items.
- CO2: EBDA before certain items was $229 million in Q3, down 19%, and $679 million year to date, down 20%, primarily due to lower commodity prices and production volumes.
- Terminals: EBDA before certain items increased 8% in Q3 and 5% year to date, with contributions from marine operations and acquired BP terminals; coal customer bankruptcies weighed on bulk terminals.
- Products Pipelines: EBDA before certain items rose 2% in Q3 and 9% year to date. Throughput and newer assets helped; reported revenue declined partly because of lower Transmix sales.
Comparability also reflects the September 1 sale of a 50% interest in SNG to Southern Company. Kinder Morgan received approximately $1.4 billion, deconsolidated SNG and retained a 50% equity interest. The sale generated an $84 million pretax loss and a $269 million deferred tax provision. Proceeds were used to reduce debt; SNG debt of $1,211 million was removed from consolidated debt.
Outlook, commentary and risks
- Management said cash, operating cash flows and borrowing capacity were adequate for expected day-to-day needs. It expected to fund 2016 growth projects while maintaining the stated $0.50-per-share common dividend, subject to board decisions and business conditions.
- 2016 capital expenditure expectations were $549 million for sustaining capital and $2,723 million for discretionary capital, including estimated remaining-year spending. Management stated it did not expect to need capital markets funding for growth projects beyond 2016, while emphasizing capital discipline and project selection.
- Management cited lower weighted-average debt balances as a contributor to lower interest expense. Short-term debt was expected to be refinanced, repaid from operating cash or asset-sale proceeds, or funded through credit facilities or new long-term debt. A $749 million Hiland note repayment was completed October 1, 2016 using SNG sale proceeds held in escrow.
- Project and investment impairments included $106 million of Northeast Energy Direct project write-offs, $64 million related to the Palmetto project, and the MEP impairment. Management said further impairments could result from lower commodity prices, weaker customer commitments, regulatory developments or reduced asset values.
- Legal and environmental reserves were $502 million and $312 million, respectively. Notable exposures include SFPP rate proceedings (shippers seek approximately $169 million in refunds and $40 million in annual rate reductions), an Eni arbitration concerning a Gulf LNG contract, and environmental matters including Portland Harbor, for which the company said its share of cleanup costs was not yet reasonably estimable. The filing describes other material claims and uncertainties; management stated it did not expect the matters overall to have a material adverse effect, but outcomes remain uncertain.
- The company identified forward-looking risks including commodity prices, customer demand and credit, contract renewals, regulatory and permitting outcomes, litigation, environmental liabilities, interest rates and the ability to execute capital projects. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the Q3 and year-to-date earnings decline reflects recurring operating performance versus the MEP impairment, SNG sale-related tax charge and other unusual items.
- Whether DCF and cash generation support the planned common dividend and capital program, noting that DCF is a non-GAAP measure and is not equivalent to operating cash flow.
- Debt maturities, refinancing costs and liquidity after the SNG proceeds were applied; the reported working-capital deficit and large current debt balance merit attention.
- The commercial outlook for MEP, Northeast Energy Direct, Palmetto and CO2 operations, including any further impairment triggers or changes in project commitments.
- Developments in significant regulatory, litigation and environmental matters, including potential rate refunds, the Gulf LNG arbitration and uncertain cleanup allocations.