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3 Things to Watch When Kinder Morgan Inc Reports Earnings This Week

By Matthew DiLallo - Apr 17, 2017 at 2:00PM

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The natural gas pipeline giant is on deck to report first-quarter results on Wednesday after the market closes.

Kinder Morgan (KMI 1.31%) has been busy this year. The company has continued its strategy of shoring up its balance sheet and high-grading its backlog so it can deliver meaningful growth in the coming years. We'll get our first look at how its recent progress will impact future projections when the company reports first-quarter results this Wednesday. Here are three things to watch in that report.

1. Any changes to the guidance

In early December Kinder Morgan put out its expectations for the year ahead. At that time, the company thought it could generate $7.2 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) and $4.46 billion of distributable cash flow, or $1.99 per share, which would be slightly less than last year. Driving the decline would be a combination of asset sales and lower oil prices, mostly offset by new projects entering service. 

Pipeline connection from crude oil field.

Image source: Getty Images.

On a more detailed level, Kinder Morgan assumed that earnings in its natural gas pipelines and carbon dioxide segments would both decline 4% year over year, partially offset by earnings increases of 1% in product pipelines, 4% at terminals, and 6% at Kinder Morgan Canada. That said, last year the company ran into some trouble early on, which caused it to miss full-year guidance. Given that history, investors should check to see if the company has run into problems at any of its segments again this year, which could cause results to fall short of guidance.

2. How recent transactions will affect its financial metrics

The reason it's important that Kinder Morgan stays on track is that it has big plans for the cash flow it expects to generate this year. The company intends to return about a quarter of it to investors via dividends, or roughly $1.1 billion, while initially planning to reinvest about $3.2 billion of it into growth projects, leaving it with around $150 million in excess for debt reduction. That forecast would put the company on pace to end the year with a debt-to-adjusted EBITDA ratio of 5.4.

However, to hit that target, Kinder Morgan needs to find a joint venture partner for its Trans Mountain Expansion project. While it hasn't announced a partner for that project just yet, the company did find a partner for a portion of its $1.3 billion Elba Liquefaction Project. That partner agreed to take a 49% stake in the project and would, therefore, reimburse Kinder Morgan for the $215 million it spent on that share of the project to date and commit to financing 49% of future capital costs. The partner also agreed to pay Kinder Morgan $170 million for the value it had created in developing the project thus far.

This transaction should have a noticeable impact on Kinder Morgan's financial plans for 2017 because it not only offloaded nearly half of its future capex liability on the project but was paid a premium on top of that. That's why investors should look to see if it puts the company on pace to reduce leverage below 5.4 times by the year's end.

Some seagulls are sitting on at pipeline, lit up by the midnight sun.

Image source: Getty Images.

3. Clues on financing for the Trans Mountain Pipeline expansion

As I mentioned above, one of the keys to Kinder Morgan's 2017 plan is finding a partner for its Trans Mountain Pipeline expansion. Last month the company announced that it has finished the final cost estimate for the project, which will now cost 7.4 billion Canadian dollars ($5.56 billion), up from an initial estimate of CA$6.8 billion ($5.11 billion). While that increased cost estimate led some shippers to drop out of the project because of the associated increase in tariffs, the company quickly found takers for those volumes. Because of that, it remains committed to starting construction on the project later this fall.

That said, before the company moves forward with the project, it needs to arrange acceptable financing. It's currently exploring a range of options, including seeking joint venture partners as well as pursuing an IPO of the project or its entire Canadian asset base. Given the importance of finding a financing solution to this project, investors should look to see where the company is in the process.

When first proposed, the market thought this project was a slam dunk for approval. However, increased opposition to this and other oil pipeline projects might make it hard to partner on this project. One example of recent troubles was Energy Transfer Partners' (NYSE: ETP) Dakota Access Pipeline, which had a key permit needed to complete the project revoked even though it had nearly completed construction. While Energy Transfer Partners was eventually able to get the permit and finish the project, it continues to make headlines after two banks sold their shares of the pipeline's loan due to pressure from those opposed to the project. This pressure might make other banks or partners reluctant to finance Kinder Morgan's project, which could limit its financing options.

Investor takeaway

Due to the relative stability of Kinder Morgan's business, it usually has pretty good visibility into future earnings. That said, investors should still take a closer look at its report to see if anything unexpected cropped up that could impact future results. Additionally, the other key thing to watch is its progress on partnering expansion projects, which is crucial to the company hitting its financial targets and possibly triggering an increase in cash heading back to shareholders.

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