01—Abstract
Summary
Summary of the 10-K filed February 9, 2018. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan's FY2017 10-K reports a year marked by a sharp drop in reported profitability but a strengthening of its capital return and funding position.
Net income attributable to KMI fell to $183 milliona (net income available to common stockholders of just $27 million), versus $708 million in 2016, largely because of a non-cash charge of roughly $1.4 billion (about $1,240 million in income tax expense) from the 2017 Tax Reform revaluation of deferred tax assets. Excluding certain items, net income available to common stockholders before certain items was about $1,472 million, and management's DCF was $4,482 million ($2.00 per share), roughly flat versus $4,511 million in 2016. Segment EBDA rose to $6,975 million from $6,364 million on a reported basis, led by Natural Gas Pipelines and Terminals, though much of the improvement reflects fewer impairments in 2017.
The balance sheet remains heavily levered, with consolidated debt of about $36.9 billionb (excluding fair value adjustments) and working capital deficits of $3.5 billion, but leverage is being reduced: total debt fell from $38.9 billion, and the company used proceeds from the KML IPO and the SNG sale to pay down debt. Cash flow from operations was $4.6 billion, and capital expenditures were $3.2 billion. Management guides to a common dividend of $0.80 per share for 2018 (a 60% increase), a $2 billion share buyback program with $250 million repurchased through February 2018, and about $2.2 billion of discretionary spending funded internally without new equity issuance.
Key risks for investors include the Trans Mountain Expansion Project (TMEP), whose C$7.4 billionc cost estimate and schedule face permitting and litigation uncertainty, with a potential one-year delay to December 2020; pending FERC rate challenges at SFPP and EPNG; environmental and Superfund exposures such as Portland Harbor, with estimated costs now around $1.1 billion; and commodity price sensitivity concentrated in the CO2 segment. The 2017 Tax Reform is moderately positive over time, delaying significant federal cash taxes until beyond 2024.
02—Key points
Key Highlights
- Reported net income attributable to KMI fell to $183M (2016: $708M); net income available to common stockholders was $27M, driven mainly by a ~$1.24-1.4B non-cash Tax Reform charge.
- Management DCF was $4,482M ($2.00/share), roughly flat versus $4,511M in 2016, excluding the tax charge's effect on earnings.
- Total segment EBDA rose to $6,975M (2016: $6,364M), with Natural Gas Pipelines at $3,487M and Terminals at $1,224M, though much of the gain reflects lower impairments.
- Consolidated debt fell to about $36.9B (from $38.9B) and cash from operations was $4.6B, supported by KML IPO and SNG sale proceeds used for debt paydown.
- 2018 guidance: dividend of $0.80/share (up 60%), $2B buyback program ($250M executed through Feb 2018), and about $2.2B of discretionary spending funded without new equity.
- TMEP remains the key project risk: cost estimate C$7.4B, cumulative spend C$930M, and potential delay of up to one year to December 2020 pending permits and court decisions.
- Legal and environmental exposures are material, including FERC rate complaints at SFPP (about $230M in refunds sought), Portland Harbor Superfund (estimated cost about $1.1B), and reserves of $350M for legal matters and $279M for environmental matters.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Kinder Morgan, Inc. kept $0.01.
- Revenue$13.71B100.0%
- Cost of revenue−$4.34B31.7%
- Gross profit$9.36B68.3%
- Operating costs−$5.83B42.5%
- Operating income$3.53B25.7%
- Interest, other & tax−$3.35B24.4%
- Net income$183.0M1.3%
Where FY2017 revenue went
$13.71B- Operating costs: $5.83B, 43% of revenue
- Cost of revenue: $4.34B, 32% of revenue
- Interest, other & tax: $3.35B, 24% of revenue
- Net income: $183.0M, 1.3% of revenue
Kept 1.3% as net incomeNet income $183.0M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 9, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $13.71B$13.06B | +5.0% |
| Cost of Revenue | $4.34B$3.43B | +26.7% |
| Gross Profit | $9.36B$9.63B | −2.8% |
| Operating Expenses | $10.18B$9.52B | +6.9% |
| Operating Income | $3.53B$3.54B | −0.3% |
| Net Income | $183.00M$708.00M | −74.2% |
| EPS (Basic) | $0.01$0.25 | −96.0% |
| EPS (Diluted) | $0.01$0.25 | −96.0% |
| Shares Outstanding (Basic) | 2.23B2.23B | 0.0% |
| Shares Outstanding (Diluted) | 2.23B2.23B | 0.0% |
05—Questions
Frequently Asked Questions
Why did KMI's net income drop so sharply in 2017 despite higher segment earnings?
The main driver was a non-cash income tax charge of about $1.24 billion (roughly $1.4 billion including related items) from remeasuring deferred tax assets from a 35% to a 21% federal rate under the 2017 Tax Reform. Income tax expense rose to $1,938M from $917M, which reduced net income to $223M and net income available to common stockholders to $27M. Before certain items, net income available to common stockholders was about $1,472M, slightly below 2016.
Is the 2018 dividend increase sustainable given the company's debt load?
Management expects to declare $0.80 per share for 2018 and projects about $4.57 billion of DCF, which would comfortably cover the roughly $1.8 billion dividend cost at that level. The company says discretionary spending will be funded from internally generated cash flow with no equity issuance needed in 2018. However, consolidated debt of about $36.9 billion and a working capital deficit of about $3.5 billion mean that financing conditions and credit ratings (BBB-/Baa3/BBB-) remain important sensitivities.
What is the biggest project risk for investors?
The Trans Mountain Expansion Project (TMEP) carries the largest uncertainty. Its estimated cost is C$7.4 billion, and KML has flagged a potential one-year delay to December 2020 due to permitting and approvals. Pending judicial reviews at the Federal Court of Appeal and the BC Supreme Court could quash approvals or force significant plan changes. KMI states that it does not expect to fund TMEP with new equity, but KML's ability to self-fund depends on these approvals.
How exposed is KMI to commodity price declines?
Most cash flow comes from multi-year fee-based contracts. The primary direct sensitivity is in the CO2 segment, where the company hedges most of the next 12 months of oil and NGL production. Management estimates that each $1 change in WTI crude changes 2018 DCF by about $7 million, and each $0.10 per MMBtu change in natural gas by about $1 million.
06—Continue