Kinder Morgan (NYSE:KMI) recently unveiled its financial expectations for the coming year. The pipeline giant foresees a modest increase in its cash flow even though it's selling its stake in Kinder Morgan Canada (TSX:KML) and a related U.S. pipeline to Pembina Pipeline (NYSE:PBA). While those transactions will negatively impact earnings, they'll bolster Kinder Morgan's balance sheet, giving it the flexibility to boost its dividend by another 25%. As a result, its yield will rise from its current level of 5.2% up to 6.4% in 2020.
Drilling down into Kinder Morgan's outlook for 2020
Kinder Morgan expects to generate $7.6 billion of adjusted EBITDA next year, which is about 3% below this year's forecasted level. That's entirely due to the upcoming sale of Kinder Morgan Canada and the U.S. portion of its Cochin pipeline to Pembina Pipeline. The company expects to receive $1.546 billion in cash and 25 million shares of Pembina, making the whole deal worth about $2.5 billion.
Distributable cash flow (DCF), on the other hand, should come in at $5.1 billion, or $2.24 per share, a roughly 3% increase from its projected level in 2019. While the loss of Kinder Morgan Canada and Cochin will impact DCF, several factors will help offset this transaction. These include the incremental cash flow from recently completed expansion projects as well as built-in contract and tariff escalators, lower interest expense, and higher commodity prices in its carbon dioxide segment.
Meanwhile, the transaction with Pembina will provide a noticeable boost to the company's balance sheet. Kinder Morgan sees its net-debt-to-adjusted-EBITDA ratio improving to 4.3 times in 2020. That's comfortably below its long-term target of 4.5 times and well below the third-quarter level of 4.7 times. Because of that, the company has lots of additional flexibility next year.
Kinder Morgan expects to use its cash flow to fund additional expansion projects as well as pay its dividend. It currently plans to invest $2.4 billion on growth-related investments, down from about $3.1 billion this year. Meanwhile, even after boosting its dividend by 25% next year, it will only pay out about 56% of its DCF. That's still well below the 60% to 65% dividend payout level of most large pipeline companies.
The flexibility to accelerate
With its leverage ratio on track to fall below its long-term target range, Kinder Morgan will have significantly more financial flexibility next year. It could, for example, borrow an additional $1.2 billion and remain within its targeted leverage level. If the company used those funds to repurchase stock or make growth-focused investments, it could increase its 2020 DCF per-share growth rate to 5% or 6% -- though that assumes the company captured the full-year benefit of those moves.
Meanwhile, Kinder Morgan could complete additional asset sales next year, which would further enhance its financial flexibility. The company's management team noted on its third-quarter conference call that it had received expressions of interest in some of its other assets from potential buyers. If those talks turn into additional transactions, or it sells its Pembina shares, the company could use the proceeds to buy back more of its stock or reinvest it into other growth-focused opportunities such as additional expansion projects or acquisitions.
Solid growth in the light of its headwinds
Kinder Morgan's projection that it will continue growing its cash flow next year, even though it's selling several assets, is a noteworthy accomplishment. That growing cash flow stream, when combined with its improved balance sheet, will enable the company to give its investors another big dividend increase next year. Meanwhile, it has the flexibility to make additional moves to grow shareholder value, which could give it the fuel to generate strong total returns again in 2020.