Kinder Morgan Inc. (NYSE:KMI) proved the resiliency of its business model yet again in the first quarter. The company's mainly fee-based assets generated robust cash flow during the quarter despite the continued weakness in the oil market. That allowed Kinder Morgan to fully cover its dividend with $206 million to spare. It also gave the company the confidence to boost its next dividend payment from $0.45 to $0.48 per share, or 6.7%. Here's a closer look at the quarter.
The numbers that matter
One thing Kinder Morgan investors need to know is that revenue and earnings per share are absolutely meaningless numbers for this company. So the fact that it missed earnings estimates by a penny and was shy on revenue doesn't matter one bit. Instead, the number that matters most is the distributable cash flow it earns, as this is the cash flow the company's business generated and is available to be paid to shareholders. For the quarter, the company produced $1.2 billion in distributable cash flow, or $0.58 per share. That was $0.10 per share above the just increased dividend of $0.48 per share and left the company with a very robust $206 million in excess cash flow, leading to a strong distribution coverage ratio of 1.2 times.
Kinder Morgan was able to generate such strong cash flow because of the stability of its five business segments, which reported $1.9 billion in segment earnings before depreciation, depletion, and amortization, or DD&A. That's roughly in line with what the company reported in the first quarter of 2014; however, that was before the company combined all of its entities under one umbrella.
As we see on that chart, the company's Natural Gas Pipeline segment delivered 1% segment earnings growth over the first quarter of 2014. Helping fuel growth was the recent acquisition of Hilland Partners, as well as strong performance from the El Paso Natural Gas Pipeline and good results at the company's South Texas Copano midstream assets. However, the segment did face some headwinds, as earnings were negatively affected by milder weather as well as a customer buyout and a restructured contract. That said, the segment remains on pace to deliver the 1% annual growth Kinder Morgan had budgeted for the year.
The other two segments that fueled the company's growth was its Products Pipelines and Terminals segments, up 20% and 16%, respectively. These two segments delivered strong organic growth from new project start-ups, as well as acquisitions in the Terminals business. Both remain on pace to meet or exceed their growth targets, with the Products Pipelines business already on pace to exceed its target for 29% growth in 2015.
It wasn't all good news at Kinder Morgan, as its Carbon Dioxide and Canada segments delivered subpar results. Segment earnings at the Carbon Dioxide business was down 23% because of weaker-than-expected oil prices as the company budgeted for $70 oil in 2015. Given that an average oil price of $70 is unlikely in 2015, the company expects to miss its budget in 2015 of an 8% decline in segment earnings. Meanwhile, segment earnings for the company's Canada segment were down 15%. This was entirely due to a strong dollar, as volumes on the company's Trans-Canada pipeline were strong while the value of the Canadian dollar declined 11% versus the U.S. dollar year over year. The company expects the currency issue to persist and now expects the segment to come in below its budgeted growth rate of 1% in 2015.
A word about the backlog
The other noteworthy item on the quarter was that Kinder Morgan was able to boost its backlog from $17.6 billion to $18.3 billion. This would suggest that the company has added more new growth projects than those removed from the backlog because of project completion or delays. However, that's not exactly what happened here, as Kinder Morgan's backlog grew only because it added $850 million in capitalized overhead to more accurately reflect the total investment in its projects.
Once that amount is stripped away, we find that the company's backlog shrank last quarter by about $200 million. This came after the company completed $400 million in projects, removed $900 million because of weak oil prices, and added $1.1 billion in new projects. Overall, the $200 million net reduction in the backlog is not a bad outcome, as it was largely expected that the company would remove nearly $1 billion in projects out of its Carbon Dioxide segment because of the continued weakness in the oil price. The fact that the company added $1.1 billion in new projects still bodes well, as it suggests that there's still a lot of demand for new energy infrastructure in North America despite weak oil and gas prices.
Overall, Kinder Morgan delivered another solid quarter. The company's tollbooth business model collected a lot of cash this quarter, which was enough to pay the dividend with a few hundred million dollars left over. Moreover, its future growth remains strong, even though the backlog actually fell a little bit.