01—Abstract
Summary
Summary of the 10-K filed February 23, 2015. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan's FY2014 10-K (filed February 23, 2015) reflects a transformational year defined by the November 26, 2014 Merger Transactions, which folded KMP, EPB and KMR into KMI at a total value of about $77 billiona.
Consolidated revenue rose 15% to $16.2 billionb and operating income rose 11% to $4.4 billion. Net income attributable to KMI was $1.03 billion, down from $1.19 billion, largely because of a $235 million Katz Strawn impairment in CO2, $272 million of total long-lived asset impairments, and a shift of earnings to noncontrolling-interest holders before the merger. Segment EBDA was roughly flat at $7.5 billion, with Natural Gas Pipelines and Terminals growing and Kinder Morgan Canada and CO2 weaker.
The balance sheet is much more leveraged and much larger. Total debt principal reached about $41 billionc, with about $11 billion floating after swaps, and the company guarantees subsidiary debt under a cross-guarantee agreement. Total assets grew to $83.2 billion.
Equity was roughly $34.4 billiond after the share issuance tied to the merger. Working capital was a deficit of $2.6 billion, and management says it intends to refinance the $2.7 billion of short-term debt through credit facilities, commercial paper, long-term notes or asset sales. Operating cash flow was $4.47 billion, up 8%, and distributable cash flow before certain items was $2.62 billion, or $2.00 per share, versus a declared dividend of $1.74.
Looking ahead, management guides to a 2015 dividend of $2.00 per share (up 15%), a $4.4 billion expansion capex budget, and the pending Hiland acquisition for about $3.0 billion. The 2015 budget assumes WTI of $70 per barrel and natural gas of $3.80 per MMBtu, and sensitivities are modest: roughly $10 million of DCF per $1/bbl WTI move and $3 million per $0.10/MMBtu gas move. Investors should weigh the strong fee-based cash flow and the expansion pipeline against the sharply higher debt load, the cross-guarantee exposure, and ongoing rate-case and litigation risk, including the $340 million environmental reserve and a $400 million legal reserve.
02—Key points
Key Highlights
- Merger Transactions (closed November 26, 2014) valued at about $77 billion absorbed KMP, EPB and KMR into KMI, with about $3.9 billion paid in cash to public unitholders and about 1.1 billion new KMI Class P shares issued.
- Revenue rose 15% to $16.2 billion and operating income rose 11% to $4.4 billion, while net income attributable to KMI fell to $1.03 billion from $1.19 billion, held back by a $235 million CO2 impairment and $272 million in total asset impairments.
- Total debt principal of about $41 billion (including $6 billion of senior notes issued for the merger), with about 26% at variable rates after swaps, and a cross-guarantee among KMI and substantially all wholly owned domestic subsidiaries.
- DCF before certain items was $2.62 billion ($2.00 per share) versus a declared 2014 dividend of $1.74, and 2015 dividends are guided to $2.00 per share (a 15% increase).
- Operating cash flow rose 8% to $4.47 billion, supported by higher net income and non-cash items; the majority of cash generation is fee-based and largely insensitive to commodity prices.
- Expansion capex budget of about $4.4 billion for 2015 plus the roughly $3.0 billion Hiland Partners acquisition (closed February 13, 2015), with major projects including Elba Liquefaction ($1.3 billion), TGP Northeast Energy Direct ($4.5–5.5 billion) and the Trans Mountain expansion ($5.4 billion).
- Working capital deficit of $2.6 billion, $2.7 billion of short-term debt due in 2015, and a $4 billion revolver with a $4 billion commercial paper program; the company says it expects to refinance maturities through credit facility borrowings, commercial paper, new long-term debt or asset sales.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Kinder Morgan, Inc. kept $0.06.
- Revenue$16.23B100.0%
- Cost of revenue−$6.28B38.7%
- Gross profit$9.95B61.3%
- Operating costs−$5.50B33.9%
- Operating income$4.45B27.4%
- Interest, other & tax−$3.42B21.1%
- Net income$1.03B6.3%
Where FY2014 revenue went
$16.23B- Cost of revenue: $6.28B, 39% of revenue
- Operating costs: $5.50B, 34% of revenue
- Interest, other & tax: $3.42B, 21% of revenue
- Net income: $1.03B, 6.3% of revenue
Kept 6.3% as net incomeNet income $1.03B · 6.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 23, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $16.23B$14.07B | +15.3% |
| Cost of Revenue | $6.28B$5.25B | +19.5% |
| Gross Profit | $9.95B$8.82B | +12.8% |
| Operating Expenses | $11.78B$10.08B | +16.8% |
| Operating Income | $4.45B$3.99B | +11.5% |
| Interest Expense | $1.81B$1.69B | +6.9% |
| Net Income | $1.03B$1.19B | −14.0% |
| EPS (Basic) | $0.89$1.15 | −22.6% |
| EPS (Diluted) | $0.89$1.15 | −22.6% |
| Shares Outstanding (Basic) | 1.14B1.04B | +9.7% |
| Shares Outstanding (Diluted) | 1.14B1.04B | +9.7% |
05—Questions
Frequently Asked Questions
What did the November 2014 Merger Transactions change for KMI shareholders?
KMI acquired all public units of KMP and EPB and all KMR shares it did not already own. Public KMP unitholders received on average 2.1931 KMI shares and $10.77 in cash per unit, EPB unitholders received 0.9451 shares and $4.65 in cash, and KMR holders received 2.4849 shares each. The transactions are treated as equity transactions, so no gain or loss was recognized, but the share count rose to about 2.1 billion Class P shares and the cash outlay was about $3.9 billion.
Is the 2015 dividend guidance of $2.00 per share supported by cash flow?
Management reports 2014 DCF before certain items of $2.62 billion, or $2.00 per share on a weighted share count of 1,312 million, compared with a $1.74 declared dividend. The 2015 guidance assumes WTI of about $70 per barrel and natural gas of $3.80 per MMBtu, with sensitivities of roughly $10 million per $1/bbl and $3 million per $0.10/MMBtu. The filing also notes that the board may borrow to pay dividends, which adds to leverage.
What are the main risks from the higher debt load?
Total debt principal is about $41 billion, roughly $11 billion of which is variable-rate after swaps, so higher interest rates would raise interest costs. The cross-guarantee agreement makes KMI liable for subsidiary debt. The company also faces credit-rating sensitivity: S&P and Fitch rate it BBB-, and Moody's rates it Baa3, all with stable outlooks. Any downgrade could raise borrowing costs and could trigger collateral posting on some derivative contracts.
How exposed is KMI to commodity prices?
Most cash generation is fee-based and not sensitive to commodity prices. Exposure sits mainly in the CO2 segment, where about 86% of 2015 third-party contract revenue is fixed or floor-priced, and in unhedged oil volumes. The company hedges the majority of its next-twelve-month oil production. The 2014 realized oil price was $88.41 per barrel after hedges, versus $86.48 before. The filing also warns that falling prices could reduce proved reserves and trigger future impairments.
What major legal and environmental exposures should investors note?
KMI carries a legal reserve of $400 million, mostly for regulatory rate proceedings, and an environmental reserve of $340 million, with a possible range up to $514 million. Pending matters include FERC complaints against SFPP and EPNG, the Union Pacific right-of-way dispute, the Plaquemines and Southeast Louisiana coastal suits, Passaic River Superfund exposure, and Portland Harbor cleanup. Management says none of these is expected to have a material adverse effect, but outcomes could exceed accruals.
06—Continue