01—Abstract
Summary
Summary of the 10-K filed February 8, 2019. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan's 2018 Form 10-K shows a company in transition: net income attributable to KMI rose to $1.609 billiona from $183 million in 2017, but much of that improvement reflects the one-time $596 million gain on the August 2018 sale of Trans Mountain (TMPL) to the Government of Canada, and 2017 was depressed by a roughly $1.4 billion non-cash charge from the 2017 Tax Reform.
Net income available to common stockholders was $1.481 billionb, or $0.66 per share. Management's own 'before certain items' measure of net income available to common stockholders was $1.982 billion, versus $1.472 billion in 2017, and DCF per share rose to $2.12 from $2.00. Segment EBDA before certain items grew modestly, led by Natural Gas Pipelines, while the company absorbed a $600 million non-cash impairment of Oklahoma gathering and processing assets.
The balance sheet strengthened materially. Cash rose to $3.28 billionc, and total debt principal fell to about $36.6 billion from $36.9 billion. Management used the TMPL proceeds distributed in January 2019 to repay roughly $1.7 billion of short-term debt, including commercial paper and $1.3 billion of maturing notes.
Credit ratings were upgraded in early 2019: S&P to BBB, with Fitch on positive outlook. Management guides to 2019 dividends of $1.00d per share (up 25% from $0.80 declared for 2018), roughly $5.0 billion of DCF, and $3.1 billion of expansion investment funded internally without equity issuance.
Key risks for investors include the Ruby Pipeline's exposure to PG&E, which filed for Chapter 11 in January 2019 and could trigger an impairment of the $750 million investment, ongoing FERC rate challenges including SFPP shipper claims of roughly $330 million in refunds, potential environmental liabilities (reserves of $271 million against a range up to $448 million), and the CO2 segment's commodity sensitivity. Dividend growth depends on sustained DCF growth and disciplined capital allocation.
02—Key points
Key Highlights
- Reported net income attributable to KMI of $1.609 billion in 2018, up from $183 million in 2017, but inflated by the one-time $596 million pre-tax gain on the TMPL sale; 2017 included a roughly $1.4 billion non-cash Tax Reform charge.
- Net income available to common stockholders before certain items rose to $1.982 billion ($1.472 billion in 2017), and DCF rose to $4.73 billion, or $2.12 per share, from $2.00 per share.
- Trans Mountain sale completed August 31, 2018 for C$4.43 billion (US$3.4 billion); KMI's ~70% share of net proceeds (~$1.9 billion after Canadian tax) was distributed in January 2019 and used to repay commercial paper and $1.3 billion of maturing notes.
- Balance sheet improved: cash of $3.28 billion at year-end 2018 (up from $264 million), short-term debt of $3.39 billion, and credit ratings upgraded in January 2019 (S&P to BBB, Fitch positive outlook).
- 2019 outlook: dividends of $1.00 per share (25% increase), ~$5.0 billion DCF, and $3.1 billion of expansion capital funded from internal cash flow with no planned equity issuance; $1.25 per share targeted for 2020.
- Material risks flagged: PG&E's Chapter 11 filing affects Ruby Pipeline ($750 million equity investment; ~$93 million annual revenues), a $600 million non-cash impairment of Oklahoma gathering assets was recorded in 2018, and the company carries $36.6 billion of consolidated debt with 31% variable-rate exposure.
- Regulatory and legal exposure remains significant: SFPP shippers seek ~$330 million in refunds and ~$30 million in annual rate reductions, the Portland Harbor Superfund cleanup is estimated at ~$1.1 billion (KMI's share undetermined), and environmental reserves total $271 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Kinder Morgan, Inc. kept $0.11.
- Revenue$14.14B100.0%
- Cost of revenue−$4.42B31.3%
- Gross profit$9.72B68.7%
- Operating costs−$5.93B41.9%
- Operating income$3.79B26.8%
- Interest, other & tax−$2.19B15.4%
- Net income$1.61B11.4%
Where FY2018 revenue went
$14.14B- Operating costs: $5.93B, 42% of revenue
- Cost of revenue: $4.42B, 31% of revenue
- Interest, other & tax: $2.19B, 15% of revenue
- Net income: $1.61B, 11% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 8, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $14.14B$13.71B | +3.2% |
| Cost of Revenue | $4.42B$4.34B | +1.7% |
| Gross Profit | $9.72B$9.36B | +3.9% |
| Operating Expenses | $10.35B$10.18B | +1.7% |
| Operating Income | $3.79B$3.53B | +7.5% |
| Net Income | $1.61B$183.00M | +779.2% |
| EPS (Basic) | $0.66$0.01 | +6500.0% |
| Shares Outstanding (Basic) | 2.22B2.23B | −0.6% |
05—Questions
Frequently Asked Questions
Why did net income jump so much in 2018 compared with 2017?
Most of the increase reflects non-recurring items. 2017 net income was depressed by a roughly $1.4 billion non-cash charge from revaluing deferred tax assets after the 2017 Tax Reform cut the federal rate to 21%. 2018 benefited from a $596 million pre-tax gain on the Trans Mountain sale, partly offset by a $600 million non-cash impairment of Oklahoma gathering and processing assets. Excluding these certain items, net income available to common stockholders rose to $1.98 billion from $1.47 billion, and the company attributes the growth mainly to Natural Gas Pipelines, Products Pipelines and CO2 segment performance.
Is the $1.00 per share 2019 dividend sustainable?
Management expects roughly $5.0 billion of 2019 DCF, which would comfortably cover a $1.00 dividend (about $2.2 billion on roughly 2.2 billion shares), and plans to fund $3.1 billion of expansion spending from internally generated cash without issuing equity. The company's 2018 DCF per share was $2.12 against $0.80 of declared dividends, providing coverage. Risks include a failure to renew contracts at attractive rates, commodity-price exposure in the CO2 segment, and possible PG&E-related impairments; the filing explicitly warns that dividend guidance is based on estimates and could be reduced.
How exposed is Kinder Morgan to the PG&E bankruptcy?
Directly, the exposure is limited to KMI's $750 million equity investment in Ruby Pipeline and a note receivable of about $55 million from Ruby. PG&E is Ruby's largest customer, representing roughly $93 million of annual Ruby revenue, and the partner's preferred interest ranks senior to KMI's. Ruby continues to perform under its contracts, and PG&E has provided credit support through a prepayment arrangement. However, if PG&E's contracts are canceled in bankruptcy, KMI could be required to recognize a material impairment of its Ruby investment.
How much debt does Kinder Morgan carry and how is it being reduced?
Consolidated debt principal was about $36.6 billion at December 31, 2018, with roughly $11.4 billion (31%) subject to variable rates including swaps. Debt was reduced in early 2019 using the TMPL proceeds: commercial paper ($0.4 billion) was repaid immediately, and $1.3 billion of notes maturing in February 2019 were retired. Management intends to refinance remaining 2019 maturities through credit facilities, commercial paper or new long-term notes. The company had about $3.97 billion of available revolving capacity at year-end, and its KMI credit facility covenant caps consolidated net debt at 5.5 times EBITDA.
What are the biggest legal and environmental liabilities disclosed?
The filing discloses several material contingencies, though management believes none will have a material adverse effect individually. These include SFPP FERC complaints in which shippers seek roughly $330 million in refunds and $30 million in annual rate cuts, the EPNG rate cases, the Portland Harbor Superfund site (estimated cleanup cost rising to about $1.1 billion, with KMI's share not yet determined), the Passaic River dioxin cleanup, and Plaquemines Parish coastal zone litigation. Total environmental reserves were $271 million at year-end 2018, against an estimated range of up to $448 million, and total legal reserves were $207 million.
06—Continue