Kinder Morgan, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Kinder Morgan owns or operates approximately 80,000 miles of pipelines and 180 terminals. Consolidated statements include KMP, EPB and KMR, including their noncontrolling interests.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $4.047 billion | $3.060 billion | +32% |
| Operating income | $1.147 billion | $1.017 billion | +13% |
| Operating margin | 28.3% | 33.2% | Down |
| Net income | $601 million | $656 million | -8% |
| Net income attributable to KMI | $287 million | $292 million | -2% |
| Diluted EPS | $0.28 | $0.28 | Flat |
| Operating cash flow | $1.118 billion | $767 million | +$351 million |
| Capital expenditures | $845 million | $598 million | +$247 million |
| Cash and equivalents | $513 million | $598 million at Dec. 31, 2013 | -$85 million |
Revenue growth reflected acquired operations, including Copano (acquired by KMP in May 2013), and increased activity and sales. Costs of sales rose to $1.643 billion from $970 million. Operating income increased, but higher interest expense ($448 million versus $402 million) and the absence of the prior-year Express pipeline sale gain contributed to lower net income. Q1 2013 included a $225 million pre-tax gain on that sale.
Segment EBDA, a company-defined non-GAAP measure, increased 6% to $1.911 billion. Natural Gas Pipelines rose 19% to $1.071 billion; CO2-KMP rose 6% to $363 million; Products Pipelines-KMP rose 12% to $208 million; and Terminals-KMP rose 15% to $214 million. Kinder Morgan Canada-KMP fell to $48 million from $193 million, with the prior period including the Express sale gain; excluding certain items, its EBDA declined 8%.
Balance sheet, debt and liquidity
Total assets were $76.054 billion and total liabilities $47.620 billion at March 31, 2014. Total debt was approximately $37.2 billion including debt fair-value adjustments; debt outstanding before those adjustments was approximately $34.4 billion, including current maturities and KMP general-partner preferred interest. Long-term debt outstanding, excluding fair-value adjustments, was $32.730 billion, up from $31.810 billion at year-end.
Working capital deficit was $2.406 billion, compared with $2.207 billion at year-end. Available borrowing capacity was approximately $1.265 billion at KMI, $2.079 billion at KMP and $1.0 billion at EPB. KMI had $410 million drawn on its revolver; KMP had $419 million of commercial paper outstanding; EPB had no revolver borrowings. Management said cash, borrowing capacity and access to financing were adequate for day-to-day requirements. Near-term debt maturities totaled $2.412 billion; management expected refinancing through long-term debt, equity, commercial paper, credit facilities or asset-sale proceeds.
Cash available to pay dividends, a non-GAAP measure, was $573 million ($0.55 per average share), versus $513 million ($0.49) a year earlier. Declared dividends were $0.42 per share versus $0.38. This cash measure should not be treated as a substitute for GAAP cash flow or earnings.
Outlook, commentary and notable items
- Management expected 2014 dividends of $1.72 per share, 8% above 2013's $1.60. The outlook depended substantially on distributions from KMP and EPB; dividends are not cumulative and the board may change its policy.
- 2014 expected capital spending was $558 million sustaining and $4.148 billion discretionary. The filing describes this as an estimate, not a guarantee.
- KMP's 2014 budget assumed average WTI crude oil of about $96.15 per barrel; management's then-current estimate was about $96.62. KMP estimated each $1 change in average WTI would affect CO2-KMP annual cash flow by about $7 million.
- KMP acquired American Petroleum Tankers and State Class Tankers for $960 million in January. Completion of four additional vessels was expected to require about $214 million, with deliveries scheduled in 2015–2016.
- On April 28, 2014, EPB announced a planned purchase from KMI of KMI's interests in Ruby Pipeline, Gulf LNG and Young Gas Storage. The transaction was expected in May; separate fairness opinions were obtained.
- Operating cash flow improved, but investing outflow increased to $1.819 billion, chiefly due to the APT acquisition and higher capital spending. Financing provided $626 million, including debt issuance and noncontrolling-interest contributions.
- Legal reserves were $665 million; environmental reserves were $366 million. Significant disclosed matters include pipeline-rate proceedings, the UPRR easement dispute, a $13.79 million judgment under appeal, a Plains claim alleging at least $100 million in damages, and environmental remediation exposures. Management stated it believed reserves were adequate and did not expect disclosed matters to have a material adverse effect, but outcomes remain uncertain.
- Key risks include financing-market access, refinancing obligations, interest-rate and commodity-price exposure, pipeline integrity and safety, environmental liabilities, regulatory rate outcomes, and litigation. Management reported no material change to the risk factors in its 2013 Form 10-K.
Most important facts for investors to verify
- Whether 2014 dividend expectations and the $1.72-per-share outlook were subsequently met, and the extent to which distributions from KMP and EPB supported them.
- Debt maturity and refinancing progress, borrowing capacity, and whether working capital deficits or financing needs changed materially.
- Underlying operating performance apart from acquisitions, prior-year Express sale gains, and other identified non-GAAP “certain items.”
- Actual costs, completion and returns on the APT vessel program and planned discretionary capital projects.
- Developments in FERC/CPUC rate cases, UPRR disputes, other litigation and environmental matters, including reserve changes and cash effects.
- Commodity-price assumptions and actual exposure, particularly KMP’s crude-oil and NGL sensitivity.