01—Abstract
Summary
Summary of the 10-K filed March 2, 2011. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan, Inc. (KMI) filed its first annual report as a public company (10-K for fiscal 2010, filed March 2, 2011) following its February 16, 2011 IPO of 109.8 million Class P common shares, which raised roughly $3.3 billiona.
The IPO was a secondary offering: all shares were sold by existing Sponsor Investors (Goldman Sachs, Highstar, Carlyle, Riverstone), and KMI received no proceeds. KMI's economic value rests primarily on its general partner interest and roughly 11% limited partner stake in Kinder Morgan Energy Partners (KMP), which accounted for about 97% of distributions KMI received in 2010. Management guided to 2011 cash available for dividends of about $820 millionb, or $1.16 per share, with quarterly dividends of $0.29 per share.
The 2010 results were mixed. Revenues rose to $8.19 billionc from $7.19 billion, and segment earnings before DD&A fell 9% to $2.77 billion, largely because of a $430 million non-cash impairment on the 20% NGPL PipeCo investment and a $172 million KMP rate-case reserve. KMI also took a $200 million charge to settle the Going Private Transaction litigation.
As a result, net income attributable to KMI was a loss of $41.3 milliond, compared with income of $495.0 million in 2009. Total debt was substantial: KMP carried about $11.5 billion of consolidated debt, and KMI's own debt was about $3.6 billion, which included $750 million of notes that matured in January 2011. KMI's credit ratings were below investment grade, so it relied on a credit facility rather than commercial paper.
The filing also raises governance and structural concerns for public shareholders. Pre-IPO investors and Richard Kinder control roughly 80% of the voting power, and the company is a "controlled company" under NYSE rules. Sponsor investors hold veto rights and the power to nominate most directors.
Supermajority board approval is required for many actions, dividend policy changes need supermajority approval while sponsors hold their thresholds, and KMP's general partner may waive incentive distributions in ways that reduce cash flow to KMI. Meanwhile, KMP's commodity sensitivity is modest, with a $1 change in WTI affecting its CO2 segment by about $5.5 million.
02—Key points
Key Highlights
- IPO raised about $3.3 billion from 109.8 million shares, but all shares were sold by existing investors and KMI received no proceeds.
- KMI expects 2011 cash available for dividends of about $820 million ($1.16 per share), with a planned quarterly dividend of $0.29 per share.
- Roughly 97% of 2010 distributions to KMI came from KMP, which makes KMI highly dependent on a single subsidiary's cash flow.
- Net loss attributable to KMI of $41.3 million in 2010, versus net income of $495.0 million in 2009, driven by a $430 million NGPL impairment and a $200 million litigation settlement.
- Revenues increased 14% to $8.19 billion, while segment earnings before DD&A declined 9% to $2.77 billion.
- Total consolidated debt is high: KMP carried about $11.5 billion, and KMI had about $3.6 billion including $750 million maturing in January 2011.
- Governance is concentrated: sponsors and Richard Kinder hold about 80% of the vote, KMI is a controlled company, and supermajority rules can block board action.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 2, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $7.85B$7.19B | +9.3% |
| Operating Expenses | $6.72B$5.78B | +16.3% |
| Operating Income | $1.13B$1.41B | −19.5% |
| Interest Expense | $668.00M$599.10M | +11.5% |
| Net Income | -$41.00M$495.00M | −108.3% |
05—Questions
Frequently Asked Questions
Did KMI receive any cash from its February 2011 IPO?
No. All 109.8 million shares sold in the IPO were sold by existing investors (Goldman Sachs funds, Highstar, Carlyle, and Riverstone). KMI received no proceeds and no members of management sold shares.
How will KMI pay its dividends, and how secure are they?
KMI's dividends depend mainly on cash distributions from KMP, which includes its general partner incentive distributions and its KMP unit holdings. Management expects about $820 million in 2011, or $1.16 per share. The dividend policy can be amended or suspended by the board, though changes require supermajority approval while sponsors hold their thresholds. KMP can also reduce distributions through interim capital transactions or waived incentive distributions, as happened in 2010.
Why did KMI post a net loss in 2010 despite growing revenue?
The loss came mainly from non-recurring charges. These included a $430 million non-cash impairment of the NGPL PipeCo investment, a $200 million settlement of Going Private Transaction litigation, and a $172 million rate-case reserve at KMP. Excluding these items, underlying segment performance improved, with gains in CO2, terminals, and natural gas pipelines.
What risks does the ownership structure create for public common stockholders?
Sponsor investors and Richard Kinder control about 80% of the voting power and can nominate most directors. Substantially all board actions require supermajority approval, which the sponsors can block. Stockholders have limited ability to enforce the shareholders agreement, and conflicts of interest exist because the sponsors may compete with KMI and directors serve on KMP-related boards.
How sensitive is KMP's cash flow to oil prices?
Most of KMP's cash flow is fee-based and not commodity-sensitive. The main exposure is in its CO2 segment, where each $1 change in the average WTI price per barrel changes cash flow by about $5.5 million, or less than 0.2% of KMP's combined segment earnings before DD&A. KMP hedges most of its crude oil production, and its realized oil price was $59.96 per barrel in 2010 versus $76.93 before hedges.
06—Continue