Kinder Morgan (NYSE:KMI) took another big leap forward in the third quarter. Not only did the company post strong financial results, but it also made tremendous strategic progress. The pipeline giant is therefore on pace to exceed its full-year outlook as well as end the year with an even stronger balance sheet than expected.

Kinder Morgan Inc. results: The raw numbers

A chart showing Kinder Morgan's earnings by segment in the third quarter of 2018 and 2017.

Data source: Kinder Morgan Inc. Chart by author.

What happened with Kinder Morgan this quarter? 

Natural gas pipelines led the way.

  • "This quarter reinforced the importance of our interconnected natural gas transportation network as that segment accounted for a substantial portion of the growth in segment earnings versus the third quarter of 2017," according to company President Kim Dang. Overall, earnings in the natural gas pipeline segment jumped 9% from the year-ago period. The company's midstream gathering and processing business helped drive that growth as it benefited from an increase in drilling activities thanks in part to higher oil prices. The company also benefited from higher volumes flowing across several of its key transmission pipelines, as well as from recently completed expansion projects.
  • Earnings in its carbon dioxide segment rose 7% from the year-ago period, thanks to higher volumes as well as strong natural gas liquids (NGLs) and carbon dioxide prices, which were up 48% and 12%, respectively, over last year's third quarter. The company also delivered strong oil production across most of its fields, led by Tall Cotton, where output jumped 28%.
  • Product pipeline earnings rose 2% because of contributions from its Cochin and Double H Pipelines, which offset some weakness on the SFPP system that transports refined products to markets along the West Coast.
  • Earnings in the terminals segment were up 1%, driven mainly by its liquids business, thanks to storage capacity increases at key hubs in Houston and Edmonton.
  • Kinder Morgan Canada's (TSX:KML) contributions declined 36%, mainly because of the loss of income from the Trans Mountain Pipeline, which the company sold to the Canadian government.
  • Overall, Kinder Morgan generated $1.9 billion of adjusted EBITDA during the quarter, which was 6% higher year over year and well above its $1.8 billion forecast. Meanwhile, distributable cash flow came in at $1.1 billion, or $0.49 per share, which was 4% higher than the year-ago period and also beat its guidance of $1 billion, or $0.45 per share. 
Several pipelines with the sun shining brightly.

Image source: Getty Images.

What management had to say 

CEO Steve Kean commented on the quarter:

The third quarter was a momentous one for our company. We closed the Trans Mountain transaction on Aug. 31 and then made a final investment decision on the Permian Highway Pipeline Project less than a week later. Our three-year campaign to strengthen KMI's balance sheet reached an important milestone, as we ended the quarter with an adjusted net debt-to-adjusted EBITDA ratio of approximately 4.6 times.

Kinder Morgan significantly increased both the clarity of its growth prospects and the strength of its balance sheet during the quarter. The company sold the Trans Mountain Pipeline and its controversial expansion project to the Canadian government during the quarter, which proved to be a wise decision in hindsight, after a court overturned its approval last month. In exchange, the company received a big injection of cash, which pushed its leverage ratio well below its goal of 5.0, enabling the company to set a new long-term leverage target of 4.5.

Meanwhile, the company bolstered its growth prospects after giving the Permian Highway Pipeline project the green light. It's the second large-scale pipeline the company is building to move natural gas from the Permian Basin to the Gulf Coast. With that addition, the company now has $6.5 billion of growth projects under way -- a $250 million increase from last quarter even after completing $550 million of expansions -- with the bulk poised to earn lucrative returns on investment backed by long-term contracts.

Looking forward 

Thanks to another better-than-expected quarter, Kinder Morgan is on pace to exceed its full-year guidance of $4.57 billion, or $2.05 per share, in distributable cash flow this year, even with the impact from the sale of Trans Mountain. The company is therefore maintaining its plan to increase its dividend by 25% in both 2019 and 2020.

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