Kinder Morgan, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Kinder Morgan operates primarily through Kinder Morgan Energy Partners (KMP), with about 37,000 miles of pipelines and 180 terminals, and owns KMP’s general partner and a limited partner interest.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $8.265 billion | $8.191 billion |
| Operating income | $1.539 billion | $1.281 billion |
| Income from continuing operations | $652.2 million | $300.3 million |
| Net income attributable to KMI | $594.4 million | $(41.3) million |
| Operating cash flow | $2.365 billion | $1.909 billion |
| Capital expenditures | $1.200 billion | $1.003 billion |
| Cash and cash equivalents at year-end | $411.4 million | $502.4 million |
| Consolidated debt, excluding swap value | $16.1 billion | $15.2 billion |
Revenue increased 0.9%, operating income 20%, and operating cash flow 24%. Operating margin, calculated as operating income divided by revenue, was approximately 18.6%, versus 15.6% in 2010. Segment earnings before depreciation, depletion and amortization (EBDA), the company’s principal segment performance measure, rose 18% to $3.273 billion; management attributed a 9% increase to underlying performance after adjusting for specified items.
Fourth quarter: Revenue was $2.017 billion, operating income $469.6 million, net income $293.1 million, and net income attributable to KMI $155.8 million. Compared with fourth-quarter 2010, these increased from $1.954 billion, $449.8 million, $166.6 million, and $63.0 million, respectively. Class P EPS was $0.22 and Class A EPS was $0.20.
KMI reported full-year Class P basic and diluted EPS of $0.74 and Class A EPS of $0.68; these reflect the period after the February 2011 IPO and the company’s share-class structure. Declared dividends were $1.05 per share for 2011 as reported, including a prorated first-quarter public-company dividend; the company said the full-year amount would have been $1.20 if public for the entire year.
Cash, debt and liquidity
- Net cash used in investing activities was $2.392 billion; financing activities used $57.0 million. Cash declined by $91.0 million during the year.
- Year-end debt included $2.899 billion of short-term debt and current maturities. Debt due within one year included KMI notes and KMP notes maturing in 2012, as well as KMP commercial paper.
- Available borrowing capacity was approximately $531 million under KMI’s $1.0 billion revolver and $1.325 billion under KMP’s $2.2 billion revolver. Management considered liquidity adequate, notwithstanding a $2.866 billion working-capital deficit, which it attributed largely to current debt classifications.
- Approximately $7.2 billion, or 45%, of consolidated debt was subject to variable rates, including debt effectively converted to variable rates through swaps. KMI’s credit ratings were below investment grade; KMP’s long-term ratings were investment grade, although Moody’s had revised its outlook to negative following the El Paso announcement.
Material changes and unusual items
- KMI moved from a private LLC to a Delaware corporation and completed its IPO in February 2011. Existing investors sold the shares; KMI received no IPO proceeds.
- KMP acquired control of KinderHawk and a 25% interest in EagleHawk for $912.1 million. Consolidation of KinderHawk resulted in a $167.2 million non-cash remeasurement loss.
- Reported results included significant legal and rate-case charges, including a $251.8 million increase in expense related to West Coast pipeline rate challenges and other litigation matters, and a $60.0 million increase in rights-of-way lease liability expense. KMI also recorded a $100 million special bonus expense for non-senior employees; the filing states the cost was not borne by Class P shareholders.
- Results improved from 2010, which included a $430 million non-cash impairment of the NGPL investment and a $200 million pre-tax Going Private Transaction litigation settlement. The 2011 increase in equity earnings also reflects the absence of that NGPL impairment.
- Segment trends were mixed: CO2 EBDA increased to $1.116 billion, terminals to $702.1 million, and Kinder Morgan Canada to $201.6 million; Products Pipelines declined to $461.3 million and Natural Gas Pipelines to $772.8 million.
Outlook, risks and contingencies
- KMI outlook: Management expected 2012 cash available for dividends of $985 million and declared dividends of $1.35 per share, a 12.5% increase over the 2011 full-year declared level. These are expectations, not assurances.
- KMP outlook: KMP expected 2012 distributions of $4.98 per unit, up 8% from $4.61 in 2011; segment EBDA of approximately $4.4 billion; and expansion investment of approximately $1.7 billion. Its budget assumed average WTI crude oil of $93.75 per barrel; each $1-per-barrel change was estimated to affect CO2 segment cash flow by about $5.8 million.
- El Paso acquisition: KMI agreed to acquire El Paso in a transaction valued at approximately $38 billion, including assumed debt. Closing was expected in the second quarter of 2012, subject to shareholder and regulatory approvals. February 2012 financing arrangements included a $6.8 billion 364-day facility, a $5.0 billion three-year term loan, and $750 million of additional revolver commitments. Planned asset sales and pipeline drop-downs were expected to reduce acquisition-related debt, but execution and proceeds were uncertain.
- Key risks include acquisition financing, approvals, integration, leverage and refinancing; dependence on KMP distributions; rate challenges and potential refunds; pipeline safety incidents and environmental liabilities; commodity-price exposure in CO2 and oil production; interest-rate and counterparty risk; and access to capital markets. The environmental reserve was $79.7 million, with an estimated range up to $134.7 million. The legal and rate-case reserve was $331.9 million.
- Shippers’ claims in West Coast proceedings included estimated requests for approximately $150 million in interstate refunds and $375 million in California reparations, plus sought annual rate reductions. These are claim amounts, not established liabilities; the company said it expected substantially lower outcomes and did not expect refunds to affect distributions or dividends. KMI reported effective disclosure controls and internal control over financial reporting; PwC issued an unqualified audit opinion.
Important facts for investors to verify
- Whether the El Paso transaction closed on the anticipated terms, and the actual post-close debt, divestiture proceeds and integration costs.
- Progress and final outcomes in FERC, California CPUC and Union Pacific easement proceedings, including cash payments, refunds and rate effects.
- Whether 2012 KMI dividends and KMP distributions were supported by recurring cash generation, and how acquisition financing affected coverage and liquidity.
- Underlying performance excluding the KinderHawk remeasurement loss, rate-case and rights-of-way charges, bonus expense, and other specified items.
- Commodity-price sensitivity, pipeline integrity and environmental exposure, including whether recorded reserves remain adequate as claims and remediation estimates develop.