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Kinder Morgan Inc. Earnings Are Right on Target

By Matthew DiLallo – Oct 20, 2016 at 8:00AM

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The natural gas pipeline giant continues to make progress towards its leverage target.

Image source: Getty Images.

Kinder Morgan's (KMI 1.75%) third-quarter results reiterated something the company has been trying to hammer home for years: Its business model is very resilient. That is evident by looking at its distributable cash flow, which came in at $1.081 billion for the quarter, down just 4.3% from last year's third quarter despite significant volatility in commodity prices. Overall, the company's results were right in line with its expectations.

Kinder Morgan Inc. results: The raw numbers

Data source: Kinder Morgan. Graph by author.

What happened with Kinder Morgan this quarter? 

Another steady-as-she-goes quarter:

  • Earnings in the company's natural gas pipeline segment edged down 2% after adjusting for certain items. Without those adjustments, which include the impact from the sale of its 50% interest in the Southern Natural Gas (SNG) pipeline to Southern Company (SO -2.07%), earnings slumped 46% to $540 million. That said, on an apples-to-apples basis, earnings were in line with expectations. Positive drivers of that in-line result were incremental revenue from expansion projects at Tennessee Gas Pipeline and increased contributions from the Hiland midstream assets and the Texas Interstate Natural Gas pipelines. However, reduced volumes across some of its gathering and processing assets, unfavorable contract renewals on the Colorado Interstate Pipeline, and a customer contract buyout on the Kinder Morgan Louisiana pipeline more than offset those incremental contributions.
  • Meanwhile, earnings in the company's carbon dioxide segment slumped 19%. Driving that decline were lower realized oil prices and a 5% decline in oil production. Slightly offsetting those issues were higher carbon dioxide volumes and lower costs.
  • Earnings in the products pipeline segment grew 2% thanks to the start-up of a second petroleum condensate processing facility and an improvement in its Transmix business.
  • Segment earnings also increased at its terminals business, up 8% year over year, due to the closing of its refined products terminals joint venture with BP (NYSE: BP) and the addition of three new Jones Act tankers to its fleet, including one in September.
  • Finally, the company's Canada segment was up slightly over last year due to continued strong oil volumes flowing through its Trans Mountain pipeline.

What management had to say 

Kinder Morgan's management team summed up two primary takeaways from its third-quarter results. First, CEO Steve Kean pointed out: 

We had a good third quarter and once again, we demonstrated the resiliency of our cash flows, generated by a large, diversified portfolio of predominately fee-based assets...We produced distributable cash flow of $0.48 per share relative to our $0.125 per share dividend, resulting in $801 million of excess distributable cash flow above our dividend.

As Kean notes, the company's primarily fee-based asset base continues to pump out steady cash flow. During the quarter, the company produced more than enough cash to cover its dividend with room to spare.

The second takeaway comes from founder Richard Kinder, who noted:

During the quarter, we substantially reduced our debt, further positioning Kinder Morgan for long-term value creation. We are ahead of our plan for 2016 year-end leverage and we're pleased with the progress toward reaching our targeted leverage level of around 5.0 times net debt-to-adjusted-EBITDA. ... This will position us to return substantial value to shareholders through some combination of dividend increases, share repurchases, additional attractive growth projects or further debt reduction.

As Kinder points out, the company made excellent progress on its debt reduction plan. The primary driver of that was its strategic transaction with Southern Company, which not only offloaded debt to the utility but brought in cash that Kinder Morgan used to redeem debt. As a result, that deal pushed the company's leverage down to 5.3 times, which is well ahead of its year-end goal to get that key metric down to 5.5 times. That said, the company's target is to get that number down to 5.0 times before it ramps up shareholder distributions, which means it has more work to do.

Looking forward 

Kinder Morgan reiterated its revised full-year guidance with a minor adjustment to reflect the transaction with Southern Company. The company's 2016 budget for distributable cash flow and adjusted EBITDA are $4.7 billion and $7.5 billion, respectively. However, due to several factors, it continues to guide for adjusted EBITDA to be about 3% below budget and for distributable cash flow to be about 4% below budget. That said, after taking into account the Southern deal, Kinder Morgan now sees adjusted EBITDA and distributable cash flow to both be 4% under budget. Despite that decline, the company reiterated its intention to pay $0.50 per share in dividends this year.  

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Southern Company. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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