01—Abstract
Summary
Summary of the 8-K filed January 17, 2024. Cited figures are marked; the original filing is the authoritative source.
Kinder Morgan (KMI) reported preliminary fourth-quarter 2023 results with mixed year-over-year performance.
Q4 net income attributable to KMI was $594 milliona versus $670 million a year earlier, EPS fell 10% to $0.27, and DCF per share declined 4% to $0.52. Management attributes the decline mainly to higher interest expense, which was anticipated in the 2023 budget, along with somewhat weaker commodity prices. For full-year 2023, Adjusted EBITDA rose 1% to $7.56 billion, DCF was $4.72 billion (down from $4.97 billion), and Net Debt-to-Adjusted EBITDA ended at 4.2x, flat against the prior year-end despite the $1.8 billion STX Midstream acquisition and about $522 million of share repurchases.
The quarter's results were supported by a $843 millionb customer prepayment of fixed reservation charges recorded as cash flow from operations. Full-year 2023 cash flow from operations was $6.49 billion, FCF was $4.17 billion, and FCF after dividends was $1.65 billion. Without that one-time-like prepayment, underlying cash generation would look weaker, so investors should treat the working-capital contribution with caution.
For 2024, KMI revised its budget to include STX Midstream, targeting EPS of $1.22c (up 15%), DCF per share of $2.26 (up 8%), and Adjusted EBITDA of $8.16 billion, with year-end leverage of 3.9x. The board declared a quarterly dividend of $0.2825 per share ($1.13 annualized, up 2%), and the 2024 dividend expectation of $1.15 per share was unchanged.
Budget figures assume WTI at $82d/bbl and Henry Hub at $3.50/MMBtu; management notes that at current lower prices ($72 WTI, $2.80 gas) EPS would still grow about 12%. These are non-GAAP and forward-looking figures that depend on execution and commodity markets.
02—Key points
Key Highlights
- Q4 2023 EPS of $0.27 (down 10% YoY) and DCF per share of $0.52 (down 4% YoY); net income attributable to KMI of $594 million vs. $670 million
- Full-year 2023 Adjusted EBITDA of $7.56 billion (up 1%) and DCF of $4.72 billion (down 5%), with the decline driven mainly by higher interest expense
- Net Debt-to-Adjusted EBITDA of 4.2x at year-end 2023, unchanged from 4.1x-range leverage despite the $1.8 billion STX Midstream acquisition closed December 28, 2023
- 2024 revised budget includes STX Midstream: EPS of $1.22 (up 15%), DCF per share of $2.26 (up 8%), Adjusted EBITDA of $8.16 billion, and year-end 2024 leverage target of 3.9x
- Quarterly dividend declared at $0.2825 per share ($1.13 annualized, up 2%); 2024 dividend expectation of $1.15 per share unchanged
- Q4 operating cash flow of $2.32 billion and full-year FCF after dividends of $1.65 billion were boosted by an $843 million customer prepayment of reservation charges
- Share repurchases of about 31.5 million shares for $522 million in 2023, leaving roughly $1.5 billion remaining under the authorization; project backlog declined to $3 billion from $3.8 billion as major projects were completed
03—Questions
Frequently Asked Questions
Why did KMI's Q4 2023 earnings and DCF per share decline year over year?
Management said the decline was largely due to higher interest expense, which had been anticipated in the 2023 budget. Net interest expense rose to $452 million in Q4 from $426 million, and full-year interest, net, increased to $1.80 billion from $1.51 billion. Lower commodity prices, milder winter weather affecting Natural Gas Pipelines, and lower CO2 segment volumes and NGL prices also weighed on results, partly offset by share repurchases, which helped per-share metrics.
Is the 2024 outlook credible given the STX Midstream acquisition and lower commodity prices?
The revised 2024 budget already incorporates STX Midstream, which management says is highly contracted (average contract length over 8 years, about 75% take-or-pay). The budget, however, assumes WTI of $82/bbl and Henry Hub of $3.50/MMBtu, well above the current levels cited in the release. Management estimates EPS would still grow about 12% and DCF per share about 6% at $72 WTI and $2.80 gas, given KMI's relatively modest commodity exposure. Investors should note that these are forward-looking, non-GAAP projections subject to execution and market risk.
How sustainable is the dividend, and how well is it covered?
The Q4 dividend of $0.2825 per share ($1.13 annualized) is a 2% increase over Q4 2022. Management cited robust coverage of $540 million in Q4, and 2023 DCF of $4.72 billion comfortably exceeded dividends paid of $2.53 billion. Full-year FCF after dividends was $1.65 billion. Coverage is strong on a DCF basis, though it is partly supported by the one-time-like $843 million customer prepayment that boosted 2023 cash flow.
What is the impact of the $843 million customer prepayment on the financials?
KMI received $843 million from a customer prepaying fixed reservation charges under long-term transportation and terminaling contracts expiring from 2035 to 2040. The amount was recorded in working capital and other items, which boosted Q4 and full-year 2023 cash flow from operations. Because it is a prepayment rather than recurring operating income, investors should not extrapolate it into future cash flow, though it reduces the cash needed to fund those services later.
How is KMI's balance sheet positioned after the STX Midstream acquisition?
Net debt rose to $31.8 billion from $30.9 billion, and short-term debt increased to $4.05 billion, reflecting borrowings used to fund the $1.8 billion acquisition. Year-end leverage was 4.2x Net Debt-to-Adjusted EBITDA. Management noted that a full year of Adjusted EBITDA from the acquired assets would bring the pro forma ratio to about 4.1x, and the 2024 budget targets 3.9x by year-end 2024. Cash on hand fell to $83 million from $745 million. The preliminary balance sheet may still be adjusted in the 2023 10-K as the purchase price allocation is finalized.
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