HOUSTON–(BUSINESS WIRE)–Kinder Morgan, Inc.’s (NYSE: KMI) board of directors today approved a cash dividend of $0.2625 per share for the third quarter ($1.05 annualized), payable on November 16, 2020, to common stockholders of record as of the close of business on November 2, 2020. This dividend represents a 5% increase over the third quarter of 2019.
KMI is reporting third quarter net income attributable to KMI of $455 million, compared to net income attributable to KMI of $506 million in the third quarter of 2019; and distributable cash flow (DCF) of $1,085 million, a 5% decrease from the third quarter of 2019.
“We are now in the seventh month of an unprecedented reduction in energy demand due to the pandemic,” said KMI Executive Chairman Richard D. Kinder. “Yet our company continued to produce considerable earnings and robust coverage of this quarter’s dividend.
“We generate substantial cash and we remain committed to funding our capital needs internally, maintaining a healthy balance sheet and returning excess cash to our shareholders through dividend increases and/or share repurchases. Once we have completed our 2021 budget process, the board will determine the fourth quarter 2020 dividend and our dividend policy for 2021,” Kinder concluded.
“We are very proud of how our team has performed during this challenging time. Essential workers in the field have adapted to new practices and procedures designed to keep everyone safe and healthy as we maintain our assets and execute on projects. Thousands of office workers have adapted to new working conditions as we continue to serve our customers and generate new business,” said KMI Chief Executive Officer Steve Kean. “Our continued success is key to providing services that are vital for the country and the world’s economy — and for the quality of life for millions of our fellow citizens.
“We have also maintained our vigilance with respect to capital spending, expenses, and increased operational efficiency. We have reduced our 2020 expenses and sustaining capital expenditures by approximately $175 million combined versus our original budget without sacrificing safety and compliance. That figure is net of more than $12 million that we will spend on personal protective equipment, enhanced cleaning protocols, temperature screening, and other measures we adopted to protect our colleagues. And we reduced our expansion capital outlook for 2020 by approximately $680 million, or almost 30%,” continued Kean.
“Finally, and as I noted last quarter, the actions we took over the last several years to strengthen our balance sheet, including reducing our net debt by $10 billion since the third quarter of 2015, have increased our resiliency for these challenging times,” Kean concluded.
“Despite the on-going headwinds facing the energy sector overall, including continued low crude oil and natural gas production and reduced demand for refined products, we generated third quarter earnings per common share of $0.20, compared to earnings per common share of $0.22 in the third quarter of 2019,” said KMI President Kim Dang. “Financial contributions from our Products Pipelines and Terminals business segments were down compared to the third quarter of 2019, primarily due to lower refined products volumes as a result of the pandemic and the December 2019 sale of Kinder Morgan Canada Limited (KML). This was somewhat offset by lower interest expense versus the same period last year.
“Adjusted earnings per share in the third quarter of 2020 were down 5% compared to the third quarter of 2019. At $0.48 per common share, DCF per share was down $0.02 from the third quarter of 2019, reflecting the items above as well as higher cash taxes due to deferrals from the second quarter of 2020. We also achieved $487 million of excess DCF above our declared dividend.
“Our project management team made excellent progress this quarter on the Permian Highway Pipeline project, with the project standing at more than 97% mechanically complete. As previously announced, we expect the project to be in service early in 2021,” said Dang. “We also completed the Elba Liquefaction project, and the facility is fully in-service. Both projects are contracted under long term, reservation-based contracts.”
For 2020, KMI’s original budget contemplated DCF of approximately $5.1 billion ($2.24 per common share) and Adjusted EBITDA of approximately $7.6 billion. Because of the pandemic-related reduced energy demand and the sharp decline in commodity prices, the company expects DCF to be below plan by slightly more than 10% and Adjusted EBITDA to be below plan by slightly more than 8%. As a result, KMI expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times.
Market conditions also negatively impacted a number of planned expansion projects such that they are not needed at this time or no longer meet our internal return thresholds. We therefore expect the budgeted $2.4 billion of expansion projects and contributions to joint ventures for 2020 to be lower by approximately $680 million. With this reduction, DCF less expansion capital expenditures is improved by approximately $135 million compared to budget, helping to keep our balance sheet strong.
KMI expects to use internally generated cash flow to fully fund its 2020 dividend payments, as well as all of its 2020 discretionary spending.
As of September 30, 2020, we had over $3.9 billion of borrowing capacity under our $4 billion credit facility and $632 million in cash and cash equivalents. We believe this borrowing capacity, current cash on hand, and our cash from operations are more than adequate to allow us to manage our cash requirements, including maturing debt, through 2021.
Due to the impracticality of predicting certain amounts required by GAAP such as unrealized gains and losses on derivatives marked to market and potential changes in estimates for certain contingent liabilities, KMI does not provide budgeted net income attributable to KMI and net income, the GAAP financial measures most directly comparable to the non-GAAP financial measures of DCF and Adjusted EBITDA, respectively, or budgeted metrics derived therefrom.
Overview of Business Segments
“The Natural Gas Pipelines segment’s financial performance was slightly down for the third quarter of 2020 relative to the third quarter of 2019,” said Dang. “The segment experienced lower contributions from multiple gathering and processing assets due to sharply reduced natural gas production, and from the sale of the Cochin Pipeline in December 2019. These reduced contributions were partially offset by greater contributions from the Elba Liquefaction and the Gulf Coast Express (GCX) projects.”
Natural gas transport volumes were down 2% compared to the third quarter of 2019, with notable volume declines on Kinder Morgan Louisiana Pipeline (KMLP) and Natural Gas Pipeline of America (NGPL) due to lower LNG demand; Ruby Pipeline, due to competition from deliveries from Canada; and Wyoming Interstate Company (WIC), due to Rockies basin production declines. These declines were partially offset by a full quarter of GCX volumes. Natural gas gathering volumes were down 13% from the third quarter of 2019 across nearly all our systems, most notably on the KinderHawk system.
“Continued low refined product demand and lower crude and condensate volumes during the third quarter reduced contributions from the Products Pipelines segment,” Dang said. “Crude and condensate pipeline volumes were down 17% and total refined product volumes were down 16% compared to the third quarter of 2019. This performance represents an improvement over the second quarter of 2020 as we saw some recovery in this sector.”
“Terminals segment earnings were lower compared to the third quarter of 2019 predominantly driven by the impacts of the December 2019 sale of Kinder Morgan Canada Limited (KML) and demand reduction attributable to the pandemic. In our liquids business, which accounts for approximately 80% of the segment, refined product volumes were down 22% compared to the third quarter of 2019, although our predominantly fixed, take-or-pay contracting profile mitigated the negative impact to earnings. Further, storage demand has remained elevated, contributing to historically-high effective utilization across our network of nearly 80 million barrels of storage capacity,” said Dang. “Our bulk business was impacted by weakness in petroleum coke and coal volumes.
“CO2 segment earnings were down slightly due to mark-to-market adjustments on hedge contracts. Excluding this impact, the segment was up slightly versus the third quarter of 2019 primarily due to lower operating expenditures and higher realized crude prices, mostly offset by lower CO2 and crude volumes. Our realized weighted average crude oil price for the quarter was up 11% at $54.83 per barrel compared to $49.45 per barrel for the third quarter of 2019, largely driven by our Midland/Cushing basis hedges,” said Dang. “Third quarter 2020 combined oil production across all of our fields was down 12% compared to the same period in 2019 on a net to KMI basis and CO2 volumes were down 33%.”
- In August 2020, KMI issued $750 million in 2% senior notes due 2031 and $500 million in 3.25% senior notes due 2050. These coupon rates were the lowest ever achieved on KMI 10-year and 30-year issuances, respectively. The proceeds were used to repay $949 million of maturing senior notes in September 2020 and to prefund early 2021 debt maturities.
Natural Gas Pipelines
- The Permian Highway Pipeline (PHP) is more than 97% mechanically complete and is on schedule to be placed in service in early first quarter 2021. The approximately $2 billion project is designed to transport up to 2.1 billion cubic feet per day (Bcf/d) of natural gas through approximately 430 miles of 42-inch pipeline from the Waha area to U.S. Gulf Coast and Mexico markets. The project is fully subscribed under long-term, firm transportation agreements. Kinder Morgan Texas Pipeline (KMTP), EagleClaw Midstream and Altus Midstream each hold an ownership interest of approximately 26.7%, and an affiliate of an anchor shipper has a 20% interest. KMTP is building and will operate the pipeline.
- Construction activities are expected to be completed during the fourth quarter of 2020 on KMI’s approximately $260 million expansion project designed to increase the delivery capacity by 1.4 Bcf/d on its Texas intrastate system. This expansion capacity will serve future LNG, industrial, electric generation and local distribution company expansions along the Texas Gulf Coast.
- Kinder Morgan received significant customer commitments through a recent open season and is moving forward with its Mier-Monterrey Pipeline system expansion project serving Mexico. The approximately $22 million project involves expanding the system’s existing capacity by 35 million cubic feet per day (MMcf/d) and is supported by long term take or pay contracts. The project is expected to be in service in the third quarter of 2021.
- Elba Liquefaction Company (ELC) completed the commissioning and startup activities on the remaining liquefaction units of the Elba Liquefaction project on August 27, 2020. Now fully in-service, the facility has a total liquefaction capacity of approximately 2.5 million metric tons per year of LNG, equivalent to approximately 350 MMcf/d of natural gas. The nearly $2 billion project is supported by long-term contracts with Shell. ELC, a KMI joint venture with EIG Global Energy Partners as a 49% partner, owns the liquefaction units and other ancillary equipment. Other facilities associated with the project are 100% owned by KMI.
- KMLP received a Federal Energy Regulatory Commission certificate order on September 17, 2020, authorizing its approximately $145 million Acadiana expansion project to provide 945,000 Dth/d of capacity to serve Train 6 at Cheniere’s Sabine Pass Liquefaction facility in Cameron Parish, Louisiana. The KMLP project is anticipated to be placed into commercial service as early as the first quarter of 2022.
- Construction is complete on NGPL’s Sabine Pass Compression Project, which was placed in service on October 1, 2020. The approximately $68 million project (KMI’s share: approximately $34 million), supported by a long-term take-or-pay contract, adds compression capacity on NGPL’s Louisiana system in order to deliver additional natural gas to the Sabine Pass Liquefaction facility.
- Construction is progressing on NGPL’s Gulf Coast Southbound project. The approximately $203 million project (KMI’s share: $101.5 million) will increase southbound capacity on NGPL’s Gulf Coast System by approximately 300,000 dekatherms per day (Dth/d) to serve Cheniere’s Corpus Christi Liquefaction facility in San Patricio County, Texas. The project is supported by a long-term take-or-pay contract and is expected to be placed into service the first quarter of 2021.
- Construction is complete on NGPL’s approximately $51 million Lockridge to Waha Project (KMI’s share: $25.5 million), which was placed in service on September 18, 2020. The project enables NGPL to deliver up to 500,000 Dth/d to the Waha Hub with an extension of its Amarillo system, and is supported by long-term take-or-pay contracts.
- Kinder Morgan has completed and placed in service the final elements in a series of projects at the Pasadena Terminal and Jefferson Street Truck Rack located on the Houston Ship Channel. The projects, totaling approximately $134 million and supported by long-term agreements, included increasing flow rates on inbound pipeline connections and outbound dock lines, tank modifications that added butane blending and vapor combustion capabilities to 10 storage tanks, expansion of the current methyl tert-butyl ether storage and blending platform, and a new dedicated natural gasoline (C5) inbound connection.
- Construction activities continue on the butane-on-demand blending system at KMI’s Galena Park Terminal. The approximately $52 million project includes construction of a 30,000-barrel butane sphere and a new inbound C4 pipeline connection, as well as tank and piping modifications to extend butane blending capabilities to 25 tanks, two ship docks, and six cross-channel pipelines. The project is supported by a long-term agreement with an investment-grade midstream company and is expected to be completed in the first quarter of 2021.
- Construction is substantially complete on an expansion of Kinder Morgan’s market-leading Argo ethanol hub. The project, which spans both the Argo and Chicago Liquids facilities, includes 105,000 barrels of additional ethanol storage capacity and enhancements to the system’s rail loading, rail unloading and barge loading capabilities. The approximately $18 million project improves the system’s inbound and outbound modal balances, adding greater product-clearing efficiencies to this industry-critical pricing and liquidity hub.
- Construction is nearing completion on a facility upgrade at the Battleground Oil Specialty Terminal Company LLC (BOSTCO) terminal, a leading fuel oil storage terminal on the Houston Ship Channel. The approximately $20 million project, which is expected to be placed in service in the fourth quarter of 2020, will add piping to allow for segregation of high sulfur and low sulfur fuel oils. KMI owns a 55% interest in and is the operator of BOSTCO.
- The CO2 segment continues to efficiently execute approved projects and generate economic production. Ongoing capital discipline and cost management practices have increased CO2 segment Free Cash Flow as compared to its 2020 budget.
Kinder Morgan, Inc. (NYSE: KMI) is one of the largest energy infrastructure companies in North America. Our mission is to provide energy transportation and storage services in a safe, efficient and environmentally responsible manner for the benefit of people, communities and businesses. Our vision is delivering energy to improve lives and create a better world. We own an interest in or operate approximately 83,000 miles of pipelines and 147 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals store and handle various commodities including gasoline, diesel fuel, chemicals, ethanol, metals and petroleum coke. For more information, please visit www.kindermorgan.com.
Please join Kinder Morgan, Inc. at 4:30 p.m. Eastern Time on Wednesday, October 21, at www.kindermorgan.com for a LIVE webcast conference call on the company’s third quarter earnings.
Non-GAAP Financial Measures
The non-generally accepted accounting principles (non-GAAP) financial measures of Adjusted Earnings and distributable cash flow (DCF), both in the aggregate and per share for each; segment earnings before depreciation, depletion, amortization (DD&A), amortization of excess cost of equity investments and Certain Items (Adjusted Segment EBDA); net income before interest expense, income taxes, DD&A, amortization of excess cost of equity investments and Certain Items (Adjusted EBITDA); Net Debt; Net Debt to Adjusted EBITDA; and Free Cash Flow in relation to our CO2 segment are presented herein.
Our non-GAAP financial measures described below should not be considered alternatives to GAAP net income (loss) or other GAAP measures and have important limitations as analytical tools. Our computations of these non-GAAP financial measures may differ from similarly titled measures used by others. You should not consider these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. Management compensates for the limitations of these non-GAAP financial measures by reviewing our comparable GAAP measures, understanding the differences between the measures and taking this information into account in its analysis and its decision-making processes.
Certain Items, as adjustments used to calculate our non-GAAP financial measures, are items that are required by GAAP to be reflected in net income (loss), but typically either (1) do not have a cash impact (for example, asset impairments), or (2) by their nature are separately identifiable from our normal business operations and in our view are likely to occur only sporadically (for example, certain legal settlements, enactment of new tax legislation and casualty losses). We also include adjustments related to joint ventures (see “Amounts from Joint Ventures” below and the accompanying Tables 4 and 7.)
Adjusted Earnings is calculated by adjusting net income (loss) attributable to Kinder Morgan, Inc. for Certain Items. Adjusted Earnings is used by us and certain external users of our financial statements to assess the earnings of our business excluding Certain Items as another reflection of the Company’s ability to generate earnings. We believe the GAAP measure most directly comparable to Adjusted Earnings is net income (loss) to Kinder Morgan, Inc. Adjusted Earnings per share uses Adjusted Earnings and applies the same two-class method used in arriving at basic earnings per common share. (See the accompanying Tables 1 and 2.)
DCF is calculated by adjusting net income (loss) attributable to Kinder Morgan, Inc. for Certain Items (Adjusted Earnings), and further by DD&A and amortization of excess cost of equity investments, income tax expense, cash taxes, sustaining capital expenditures and other items. We also include amounts from joint ventures for income taxes, DD&A and sustaining capital expenditures (see “Amounts from Joint Ventures” below). DCF is a significant performance measure useful to management and external users of our financial statements in evaluating our performance and in measuring and estimating the ability of our assets to generate cash earnings after servicing our debt, paying cash taxes and expending sustaining capital, that could be used for discretionary purposes such as common stock dividends, stock repurchases, retirement of debt, or expansion capital expenditures. DCF should not be used as an alternative to net cash provided by operating activities computed under GAAP. We believe the GAAP measure most directly comparable to DCF is net income (loss) to Kinder Morgan, Inc. DCF per common share is DCF divided by average outstanding common shares, including restricted stock awards that participate in common share dividends. (See the accompanying Tables 2 and 3.)
Adjusted Segment EBDA is calculated by adjusting segment earnings before DD&A and amortization of excess cost of equity investments (Segment EBDA) for Certain Items attributable to the segment. Adjusted Segment EBDA is used by management in its analysis of segment performance and management of our business. General and administrative expenses and certain corporate charges are generally not under the control of our segment operating managers, and therefore, are not included when we measure business segment operating performance. We believe Adjusted Segment EBDA is a useful performance metric because it provides management and external users of our financial statements additional insight into the ability of our segments to generate segment cash earnings on an ongoing basis. We believe it is useful to investors because it is a measure that management uses to allocate resources to our segments and assess each segment’s performance. We believe the GAAP measure most directly comparable to Adjusted Segment EBDA is Segment EBDA. (See the accompanying Tables 3 and 7.)
Adjusted EBITDA is calculated by adjusting net income before interest expense, income taxes, DD&A, and amortization of excess cost of equity investments (EBITDA) for Certain Items. We also include amounts from joint ventures for income taxes and DD&A (see “Amounts from Joint Ventures” below). Adjusted EBITDA is used by management and external users, in conjunction with our Net Debt (as described further below), to evaluate certain leverage metrics. Therefore, we believe Adjusted EBITDA is useful to investors. We believe the GAAP measure most directly comparable to Adjusted EBITDA is net (loss) income. (See the accompanying Tables 3 and 4.)
Amounts from Joint Ventures – Certain Items, DCF and Adjusted EBITDA reflect amounts from unconsolidated joint ventures (JVs) and consolidated JVs utilizing the same recognition and measurement methods used to record “Earnings from equity investments” and “Noncontrolling interests,” respectively. The calculations of DCF and Adjusted EBITDA related to our unconsolidated and consolidated JVs include the same items (DD&A and income tax expense, and for DCF only, also cash taxes and sustaining capital expenditures) with respect to the JVs as those included in the calculations of DCF and Adjusted EBITDA for our wholly-owned consolidated subsidiaries. (See Table 7, Additional JV Information.) Although these amounts related to our unconsolidated JVs are included in the calculations of DCF and Adjusted EBITDA, such inclusion should not be understood to imply that we have control over the operations and resulting revenues, expenses or cash flows of such unconsolidated JVs. DCF and Adjusted EBITDA are further adjusted for certain KML activities attributable to our noncontrolling interests in KML for the periods presented through KML’s sale on December 16, 2019 (See Table 7, KML Activities Prior to December 16, 2019.)
Net Debt is calculated by subtracting from debt (i) cash and cash equivalents, (ii) the preferred interest in the general partner of Kinder Morgan Energy Partners L.