When energy infrastructure juggernaut Kinder Morgan (NYSE:KMI) reported its second-quarter results last week, the company provided investors with a boatload of numbers to digest. However, to prevent investors from suffering from information overload the company's CFO Kim Dang spent some time on the ensuing conference call to reiterate the importance of three financial metrics in particular. She believed that these numbers were the most important ones that investors should take away from the company's quarterly results.
1. No change to the updated guidance
Dang started off her comments by saying,
Number one... our full year guidance has not changed from the updated guidance we gave you last quarter. We continue expect that EBITDA will be about 3% below budget and DCF (distributable cash flow) would be approximately 4% below budget. Being consistent with the guidance we gave you last quarter, this guidance does not include the impact of the SNG JV, which we anticipate will close in the late third or early fourth quarter.
Despite solid second quarter results, and the fierce rally in oil and gas prices during the quarter, Kinder Morgan is not adjusting its guidance that projects EBITDA to be 3% less than $8 billion with DCF coming in 4% below $4.7 billion. This is a bit of a disappointment. Instead of forecasting a benefit from the recent rise in commodity prices above its budget projection, the company essentially sees any positive impact offset by weaker volumes on its pipelines as well as the continued impact of coal customer bankruptcies.
Dang also noted that the guidance does not include any impact from the company's sale of a 50% stake in the Southern Natural Gas (SNG) pipeline system to leading utility Southern Company (NYSE:SO). That is worth pointing out because the company will be handing over half of that pipeline's roughly $400 million in annual EBITDA to Southern Company in exchange for a $1.47 billion cash payment and the assumption of $1.2 billion of the pipeline system's debt. Needless to say, this sale will result in full-year EBITDA coming in further below the initial budget.
2. We have changed our leverage expectations for the year
That said, while the joint venture agreement with Southern Company will have an adverse impact on earnings, the benefit to the balance sheet is what is driving the deal in the near-term. Dang noted that,
Secondly, we expect to end the year at 5.3 times debt-to-EBITDA, which is down from our budget guidance and the guidance we gave you last quarter, largely as a result of our balance sheet improvement efforts. When you annualize the EBITDA impact from the SNG transaction, we expect that the full year impact would be slightly higher than the 5.3 times.
Initially, Kinder Morgan's goal was to get its debt-to-EBITDA ratio below 5.5 times by the end of the year. However, this one transaction accomplished that and more.
3. Hitting this leverage target is a must before shareholder distributions increase
Still, despite that significant progress, the company has more work to do before it starts sending more cash to shareholders. Dang noted this by saying that,
And third, our debt-to-EBITDA target is still around five times and once we've reached that level we will decide how to return value to shareholders, but we're not committing to specific method at this time.
Given that target ratio, Kinder Morgan is at least one more significant transaction away from being in the position to increase cash distributions. That said, it is not in a hurry to hit that target. Thanks to its recent progress, CEO Steve Kean said on the call that the company is "in the position of being more patient and selective as we look at any other opportunities really for the balance of the year." Further, the company made it clear that it will not commit to any particular method of returning incremental cash to investors, with a stock buyback, a dividend increase, or a combination of the two still on the table. In other words, investors probably shouldn't bank on a dividend boost in 2016.
Kinder Morgan's CFO wanted investors to understand that the company's financial situation as a whole is stable to improving. That said, it still has more work to accomplish before shareholders see additional value head their way. That outlook could keep a lid on shares for a while, at least until the company completes the necessary transactions to hit its leverage target.