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Kinder Morgan Gets 2021 Off to a Roaring Start

By Matthew DiLallo - Apr 22, 2021 at 9:26AM

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The natural gas pipeline giant benefited from the recent weather-related disruptions in Texas.

A winter storm ravaged Texas in February. It crippled the state's power grid, causing several natural gas and renewable energy assets to freeze. 

However, Kinder Morgan's (KMI 1.31%) business remained fully operational during the storm, enabling it to continue supplying critical fuel to customers. That allowed it to capture higher profit margins because of the market dislocation and produce an unexpected gusher of cash during the quarter. 

Here's a closer look at the period and what the company sees ahead.

Drilling into Kinder Morgan's first-quarter results

Metric

Q1 2021

Q1 2020

Change

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)

$2.814 billion

$1.848 billion

52.3%

Distributable cash flow (DCF)

$2.329 billion

$1.261 billion

84.7%

DCF per share

$1.02

$0.55

85.5%

Data source: Kinder Morgan.

As that table shows, Kinder Morgan racked up monster numbers in the first quarter. It generated roughly $1 billion of additional EBITDA and DCF in the period. The main fuel source was the company's natural gas pipeline segment.

Kinder Morgan's earnings in the first quarter of 2021 and 2020.

Data source: Kinder Morgan. Chart by the author.

Kinder Morgan posted tremendous results in its natural gas pipeline segment because of the storm in Texas during the quarter. Earnings in the segment rocketed 78% year over year. The company benefited from higher contributions from its Texas intrastate systems and Tennessee Gas Pipeline system, which continued delivering gas into the market throughout the storm. The company's natural gas storage segment played a pivotal role as Kinder Morgan sold gas at contractual and prevailing market prices to utilities and power plants, including some customers that typically get their gas elsewhere. That more than offset weaker results from some of its other assets due to lower production in the quarter.

The company's carbon dioxide segment also benefited from the disruptions caused by the storm as its earnings surged 66%. The company curtailed some of its oil production during the storm, enabling it to return power to the grid under an existing contract with its electricity provider. That more than offset the impact of the lost production, lower carbon dioxide output, and lower oil prices during the quarter.

While the storm helped fuel higher results for those two segments, it hurt its other two businesses.

Earnings from products pipelines dipped 4% year over year. The winter storm caused temporary supply disruptions, impacting demand for refined products, causing volumes for gasoline, jet fuel, and crude oil to decline. That more than offset a 6% increase in diesel demand due to its use in backup power generation from the storm and a surge in economic activity as the pandemic starts to fade.

Meanwhile, earnings from its terminal operations declined by 12%. Extended refinery outages caused by the storm impacted refined product and petroleum coke volumes at its facilities.

A gas field covered in snow at sunset.

Image source: Getty Images.

A look at what's ahead for Kinder Morgan

Kinder Morgan's monster first-quarter showing led the company to boost its full-year guidance. It now expects to generate between $7.6 billion and $7.7 billion of adjusted EBITDA. That's a significant improvement from its initial outlook of $6.8 billion of adjusted EBITDA. This new forecast implies a 10% increase at the midpoint from 2020's level instead of a 2% decline. The company also increased its DCF outlook to between $5.1 billion and $5.3 billion, up from its $4.4 billion budget. That's a more than 13% increase at the midpoint from last year instead of a 3% decline.

That significant improvement comes even though Kinder Morgan and partner Brookfield Infrastructure (BIP 1.86%) (BIPC 1.01%) agreed to sell a 25% stake in Natural Gas Pipeline Company of America to a private equity fund for $830 million. Kinder Morgan received $431 million in net proceeds from that transaction while retaining a 37.5% interest in the business.

Those cash proceeds, along with the improved earnings outlook, will significantly bolster Kinder Morgan's financial profile. The company now expects to end the year with a net debt-to-adjusted EBITDA ratio in the range of 3.9 to 4.0. That's well above its initial expectations that leverage would end the year at 4.6 times, right around its 4.5 target. That gives the company more financial flexibility to return cash to shareholders through future dividend increases -- it has already boosted the payout by 3% this year -- and share repurchases.

An unexpected gusher

Kinder Morgan was able to take advantage of opportunities caused by the winter storm to supply Texas with much-needed fuel and power. That enabled it to generate an additional $1 billion in cash, significantly improving its earnings outlook and balance sheet. While that's a one-time boost, Kinder Morgan now has more flexibility to return money to investors and take advantage of new investment opportunities to create long-term shareholder value.

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Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.98 (1.31%) $0.22
Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
BIP
$38.93 (1.86%) $0.71
Brookfield Infrastructure Corporation Stock Quote
Brookfield Infrastructure Corporation
BIPC
$42.93 (1.01%) $0.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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