Kinder Morgan, Inc. — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2014. Kinder Morgan operated approximately 80,000 miles of pipelines and 180 terminals across North America, with six reportable segments. On November 26, 2014, it completed approximately $77 billion of merger transactions acquiring the public interests in KMP, EPB and KMR. The resulting share issuance, cash consideration and ownership changes materially affect year-over-year comparisons; KMI reported no merger-related gain or loss in consolidated income.
Financial performance and position
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Revenue | $16.226 billion | $14.070 billion | Up 15.3%; acquisitions and higher activity contributed. |
| Operating income | $4.448 billion | $3.990 billion | Up 11.5%; operating margin was 27.4%, versus 28.4%. |
| Net income | $2.443 billion | $2.692 billion | Down 9.2%. |
| Net income attributable to KMI | $1.026 billion | $1.193 billion | Down 14.0%; diluted EPS was $0.89 versus $1.15. |
| Segment EBDA | $7.494 billion | $7.499 billion | Essentially flat as reported. |
| DCF before certain items (non-GAAP) | $2.618 billion; $2.00/share | $1.713 billion; $1.65/share | Higher; management’s measure of cash available for dividends. |
| Cash from operations | $4.467 billion | $4.122 billion | Up 8.4%. |
| Capital expenditures | $3.617 billion | $3.369 billion | Includes sustaining and expansion spending. |
| Cash and cash equivalents | $315 million | $598 million | Down $283 million. |
| Debt principal, excluding fair-value adjustments | $41.029 billion | $34.216 billion | Increase reflects merger financing and other borrowing. |
Consolidated total debt on the balance sheet, including debt fair-value adjustments, was $42.963 billion. Approximately $11 billion of debt was exposed to variable rates, including fixed-rate debt converted through swaps. Working capital was negative $2.610 billion, compared with negative $2.207 billion in 2013. KMI had a $4 billion revolving credit facility and commercial paper program; reported facility availability at year-end was $2.541 billion. The filing states that cash, borrowing capacity and access to financing were adequate for anticipated obligations, while noting capital-market access is not assured.
For 2014, KMI declared dividends of $1.74 per share, up from $1.60. It expected 2015 dividends of $2.00 per share, a 15% increase. Reported revenues include substantial natural gas purchases and sales; natural gas sales represented 25% of consolidated revenues in 2014, so revenue growth alone does not indicate equivalent growth in service margins.
Material changes versus the prior comparable period
- The merger was completed late in 2014, adding approximately 1.097 billion KMI shares and $3.9 billion of cash consideration to public KMP and EPB holders. KMI issued $6 billion of senior notes in connection with the transactions. Consolidated noncontrolling interests fell from $15.192 billion to $350 million.
- Revenue rose, but reported net income and KMI-attributable income declined. Comparisons are affected by the shorter post-merger period, changed ownership attribution and prior-year gains, including a $558 million Eagle Ford remeasurement gain and a $224 million Express pipeline investment sale gain in 2013.
- 2014 included a $235 million non-cash impairment, primarily for the Katz Strawn oil-producing unit, and $29 million write-down related to a pending terminal sale. Total long-lived asset impairment expense was $272 million.
- Segment trends were mixed: Natural Gas Pipelines EBDA before certain items increased to $4.069 billion from $3.717 billion; Terminals increased to $979 million from $798 million; Products Pipelines increased to $860 million from $784 million; CO2 increased to $1.458 billion from $1.432 billion. Kinder Morgan Canada declined to $182 million from $200 million before certain items.
- Cash from operations increased, while cash at year-end decreased. Cash used in investing activities was $5.210 billion, including capital expenditures, acquisitions and investment contributions.
Outlook, commentary, risks and contingencies
- 2015 outlook: Management budgeted an average WTI price of $70 per barrel and natural gas at $3.80 per MMBtu, and anticipated approximately $8 billion of segment earnings before DD&A, including its share of joint-venture DD&A. It estimated that each $1 per barrel change in average WTI would affect DCF by about $10 million, and each $0.10/MMBtu change in gas by about $3 million, absent additional hedging. These are estimates, not guarantees.
- Investment program: Expected 2015 sustaining capital was $586 million and discretionary capital was $4.381 billion. The filing describes substantial projects, including the Trans Mountain expansion, subject to approvals, execution, cost and timing risks. Hiland Partners was acquired in February 2015 for approximately $3.058 billion including assumed debt, a subsequent event rather than a 2014 acquisition.
- Commodity exposure: Management characterized most asset cash flow as fee-based and supported by multi-year arrangements, but identified commodity sensitivity, particularly in CO2 and oil production. Lower oil prices may reduce production economics, reserves and asset values; 2014 included a sharp late-year decline in oil prices.
- Leverage and liquidity: Debt and cross-guarantees may constrain financing, dividends and investment flexibility. Approximately $2.717 billion of debt principal was classified as due within one year at December 31, 2014; management intended to refinance short-term debt. Credit facility covenants restrict leverage and certain transactions.
- Environmental and legal matters: Environmental reserves were $340 million, with estimated exposure ranging up to $514 million; management recorded the low end of the range. Legal reserves totaled $400 million. A California CPUC settlement resolving SFPP proceedings required $319 million in refunds, which SFPP reported paying in December 2014. Other FERC rate cases, railroad easement disputes, environmental matters and litigation remained, with outcomes uncertain.
- Other operational risks: Pipeline safety incidents, integrity requirements, permitting and construction delays, customer credit, regulation, severe weather, cyber threats, foreign exchange and counterparty risks could affect results. The filing reported effective disclosure controls and internal control over financial reporting as of year-end.
Key investor verification points
- Reconcile the merger’s share issuance, cash and debt financing, ownership attribution and subsequent full-year impact on per-share earnings and dividends.
- Assess DCF and dividend coverage alongside sustaining capital, working-capital needs, financing costs and the non-GAAP adjustments used in DCF.
- Review debt maturities, variable-rate exposure, cross-guarantees, covenant headroom and refinancing of short-term obligations, including post-year-end Hiland financing.
- Track 2015 commodity assumptions and hedges, and test the effect of sustained low oil prices on CO2 operations, reserves and impairment risk.
- Monitor approval, cost and schedule risks for major expansion projects, especially Trans Mountain, and confirm expected customer commitments and returns.
- Update estimates for environmental and legal exposure, including the environmental reserve range and unresolved rate, easement and litigation matters.