01—Abstract
Summary
Summary of the 10-K filed February 23, 2012. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan, Inc. (KMI) FY2011 10-K, filed February 23, 2012, centers on the pending $38 billiona acquisition of El Paso Corporation (EP), announced October 16, 2011 and expected to close in Q2 2012.
Consideration per EP share is $14.65b in cash, 0.4187 KMI Class P shares and 0.640 KMI warrants (exercise price $40, five-year term), valued at $26.87 at announcement, with a 47% premium to EP's 20-day average. The deal is financed with a $6.8 billion 364-day bridge, a $5.0 billion three-year term loan and a $750 million revolver increase, and management expects asset drop-downs and EP E&P sales to substantially reduce the debt needed. Investors should weigh the leverage this adds against a company already carrying $16.1 billion of consolidated debt, of which about 45% is variable rate.
The filing also notes non-investment-grade ratings at KMI and a downgrade-related pressure on KMP's credit. KMI's economics are overwhelmingly dependent on its ownership of the general partner of Kinder Morgan Energy Partners (KMP) and related distributions. Approximately 98% of 2011 distributions to KMI came from KMP, and KMI's cash available to pay dividends rose to $835.3 millionc in 2011 from $654.1 million in 2010.
Reported 2011 net income attributable to KMI was $594.4 milliond, compared with a $41.3 million loss in 2010, which included a $430 million NGPL impairment and a $200 million Going Private litigation settlement. Dividends declared were $1.05 per share for 2011 on a partial-year basis (full-year equivalent $1.20), and management guides to $1.35 for 2012. Results were also affected by a $167.2 million non-cash KinderHawk remeasurement loss and a $251.8 million rate-case and litigation reserve increase at KMP's West Coast products pipelines.
Governance and control are important considerations for investors. The Sponsor Investors and Richard Kinder control roughly 80% of the voting power, KMI is a 'controlled company' under NYSE rules, and the Sponsor Investors hold supermajority-type veto rights over board actions and dividend policy changes.
KMI's Class A, B and C shares convert into a fixed number of Class P shares, so the economic interests of public holders are diluted only by the EP transaction and any future issuances. Overall, the filing presents a fee-based, growth-oriented midstream platform whose 2012 outlook depends heavily on successful closing and integration of EP.
02—Key points
Key Highlights
- Pending El Paso (EP) acquisition: approximately $38 billion total purchase price including assumed debt, valued at $26.87 per EP share, with expected close in Q2 2012 subject to shareholder and regulatory approvals.
- Financing: $6.8 billion 364-day bridge, $5.0 billion three-year term loan and $750 million incremental revolver commitment; drop-downs of EP pipeline assets and sale of EP's E&P business are expected to materially reduce acquisition debt.
- Leverage: $16.1 billion consolidated debt at 12/31/2011, with about 45% variable rate exposure; KMI's own credit ratings are below investment grade.
- KMP dependence: approximately 98% of 2011 distributions to KMI came from KMP; KMP guides to $4.98 per unit distributions in 2012 (+8%) and $1.7 billion of 2012 expansion capex.
- 2011 earnings: net income attributable to KMI of $594.4 million vs. a $41.3 million loss in 2010; cash available to pay dividends of $835.3 million vs. $654.1 million in 2010.
- Dividend outlook: 2011 declared dividends of $1.20 per share on a full-year basis; guidance of $1.35 per share for 2012 (12.5% increase) with about $985 million of cash available for dividends.
- Governance: Sponsor Investors and Richard Kinder hold about 80% of voting power; KMI is a controlled company with supermajority board approval requirements that give sponsor directors significant veto power.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Kinder Morgan, Inc. kept $0.03.
- Revenue$9.97B100.0%
- Cost of revenue−$3.06B30.7%
- Gross profit$6.92B69.3%
- Operating costs−$4.32B43.3%
- Operating income$2.59B26.0%
- Interest, other & tax−$2.28B22.8%
- Net income$315.0M3.2%
Where FY2012 revenue went
$9.97B- Operating costs: $4.32B, 43% of revenue
- Cost of revenue: $3.06B, 31% of revenue
- Interest, other & tax: $2.28B, 23% of revenue
- Net income: $315.0M, 3.2% of revenue
Kept 3.2% as net incomeNet income $315.0M · 3.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 23, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $9.97B$7.94B | +25.6% |
| Cost of Revenue | $3.06B$3.28B | −6.7% |
| Gross Profit | $6.92B$4.67B | +48.3% |
| Operating Expenses | $7.38B$6.52B | +13.2% |
| Operating Income | $2.59B$1.42B | +82.2% |
| Interest Expense | $1.43B$703.00M | +103.0% |
| Net Income | $315.00M$594.00M | −47.0% |
05—Questions
Frequently Asked Questions
Why is the El Paso acquisition significant for KMI shareholders?
The acquisition, valued at about $38 billion including debt, would make the combined company the largest natural gas pipeline owner in North America with roughly 67,000 miles of gas transportation pipelines, and expands KMI's position in shale plays. For shareholders it adds scale and fee-based cash flow, but it also brings substantial new debt, integration risk and the dilution from roughly 0.4187 KMI shares per EP share issued in the deal.
How will KMI pay for the cash portion of the EP deal?
KMI plans to use a $6.8 billion 364-day bridge facility, a $5.0 billion three-year term loan and a $750 million increase to its existing revolver. Management expects planned sales of EP's natural gas pipeline assets to KMP and El Paso Pipeline Partners, plus the sale of EP's exploration and production business and available net operating loss carryforwards, to substantially reduce the debt ultimately needed.
How dependent is KMI's cash flow on Kinder Morgan Energy Partners?
Very dependent. Approximately 98% of KMI's 2011 distributions from subsidiaries came from KMP, mainly through KMI's ownership of KMP's general partner and its incentive distributions. Any decline in KMP's revenues, increase in its costs, or change in its distribution policy would directly reduce cash available to KMI's dividends.
What control rights do the Sponsor Investors have over KMI?
The Sponsor Investors (Goldman Sachs funds, Highstar, Carlyle and Riverstone) and Richard Kinder together hold about 80% of the voting power and, under the shareholders agreement, can nominate most board seats. Supermajority board approval is required for many actions, including changes to the dividend policy, and the Sponsor Investors have veto rights over substantially all board actions. Public common shareholders therefore have limited influence over corporate decisions.
What were the key negative items in KMI's 2011 results?
The most notable items were a $167.2 million non-cash loss from remeasuring KMP's previously held KinderHawk interest, a $251.8 million increase in KMP's rate-case and litigation liabilities mainly tied to West Coast products pipelines, a $100 million special bonus for non-senior employees (paid with $64 million of reserved earnings), and a $69.7 million rights-of-way expense adjustment related to the Union Pacific easement dispute.
06—Continue