Credit Profile Significantly Enhanced with Net Debt Reduction of Over $2 Billion since Last Quarter
HOUSTON–(BUSINESS WIRE)–$KMI #KinderMorgan–Kinder Morgan, Inc. (NYSE: KMI) today announced that its board of directors approved a cash dividend of $0.125 per share for the quarter ($0.50 annualized) payable on Nov. 15, 2016, to common shareholders of record as of the close of business on Nov. 1, 2016. KMI expects to declare dividends of $0.50 per share for 2016 and use cash in excess of dividend payments to fund growth investments and strengthen its balance sheet.
KMI continues to make significant progress toward enhancing its credit profile. On Sept. 1, 2016, KMI closed the previously announced agreement to partner with Southern Company through the sale of a 50 percent interest in the Southern Natural Gas (SNG) pipeline system for cash consideration of over $1.4 billion plus Southern Company’s share of SNG’s debt. KMI used the entire amount of cash proceeds to reduce its net debt. As of the end of the third quarter, $749 million was held in escrow to redeem debt and was not included in net debt reduction during the quarter. The debt was redeemed on Oct. 1, 2016, and will result in further net debt reduction in the fourth quarter of 2016.
“During the quarter, we substantially reduced our debt, further positioning Kinder Morgan for long-term value creation. We are ahead of our plan for 2016 year-end leverage and we’re pleased with the progress toward reaching our targeted leverage level of around 5.0 times net debt-to-Adjusted EBITDA,” said Richard D. Kinder, executive chairman. “This will position us to return substantial value to shareholders through some combination of dividend increases, share repurchases, additional attractive growth projects or further debt reduction.
“Additionally, we are pleased with our operational performance for the quarter despite continued weak market conditions in our industry. Our performance, adjusted for the SNG transaction, remains consistent with our guidance provided since April. We remain on track to generate full year 2016 distributable cash flow in excess of our expected dividends and our expected growth capital expenditures, eliminating our need to access the capital markets to fund growth projects in 2016. Moreover, given our continued efforts to high-grade our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.”
President and CEO Steve Kean said, “We had a good third quarter and once again, we demonstrated the resiliency of our cash flows, generated by a large, diversified portfolio of predominately fee-based assets. We generated a loss per common share for the quarter of $0.10, primarily as a result of non-cash charges discussed below. That said, we produced distributable cash flow of $0.48 per share relative to our $0.125 per share dividend, resulting in $801 million of excess distributable cash flow above our dividend.”
Kean added, “We continue to drive future growth by completing significant infrastructure development projects in our sizable project backlog. Our current project backlog is $13.0 billion, down from $13.5 billion at the end of the second quarter of 2016. This reduction was driven by the delivery of the Garden State and Bay State tankers as well as placing other projects in service. Excluding the CO2 segment projects, we expect the projects in our backlog to generate an average capital-to-EBITDA multiple of approximately 6.5 times.”
KMI reported a third quarter net loss available to common stockholders of $227 million, compared to net income available to common stockholders of $186 million for the third quarter of 2015, and distributable cash flow of $1,081 million versus $1,129 million for the comparable period in 2015. The decrease in distributable cash flow for the quarter was attributable to lower contributions from the CO2 segment primarily due to lower commodity prices. In total, KMI’s other business segments generated higher contributions than the third quarter of 2015. Net income available to common stockholders was also impacted by a $405 million unfavorable change in total certain items compared to the third quarter of 2015, including a partial write down of our equity investment in Midcontinent Express Pipeline (MEP) driven by expectations for lower future transportation contract rates as well as a non-cash book tax expense associated with the SNG transaction.
For the first nine months of 2016, KMI reported net income available to common stockholders of $382 million, compared to $948 million for the first nine months of 2015, and distributable cash flow of $3,364 million versus $3,466 million for the comparable period in 2015. The decrease in distributable cash flow was primarily attributable to lower contributions from the CO2 segment, higher preferred stock dividends and higher cash taxes, partially offset by increased contributions from all of KMI’s other segments and lower interest expense. Net income available to common stockholders was further impacted by a $480 million unfavorable change in total certain items compared to the first nine months of 2015, including the write down of our equity investment in MEP, the non-cash book tax expense associated with the SNG transaction, and a $170 million write-off of costs associated with the Northeast Energy Direct Market and Palmetto Pipeline projects during the first quarter of 2016.
For 2016, KMI expects to declare dividends of $0.50 per share. KMI’s budgeted 2016 distributable cash flow was approximately $4.7 billion and budgeted 2016 Adjusted EBITDA was approximately $7.5 billion. Consistent with guidance provided the last two quarters, the company continues to expect Adjusted EBITDA to be about 3 percent below budget and distributable cash flow to be about 4 percent below budget. To be consistent with previous quarters, this guidance does not take the SNG transaction into account. Including the impact of the SNG transaction, the company expects Adjusted EBITDA and distributable cash flow to each be about 4 percent below budget. KMI does not provide budgeted net income attributable to common stockholders (the GAAP financial measure most directly comparable to distributable cash flow and Adjusted EBITDA) due to the inherent difficulty and impracticality of quantifying certain amounts required by GAAP such as ineffectiveness on commodity, interest rate and foreign currency hedges, unrealized gains and losses on derivatives marked to market, and potential changes in estimates for certain contingent liabilities.
KMI expects to generate excess cash sufficient to fund its growth capital requirements without needing to access capital markets and expects to end the year with a net debt-to-Adjusted EBITDA ratio of approximately 5.3 times, consistent with where KMI ended the third quarter and below the budgeted year-end ratio of 5.5 times. KMI’s growth capital forecast for 2016 is approximately $2.7 billion.
The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has direct commodity price sensitivity is in its CO2 segment, and KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. Additionally, KMI continues to closely monitor counterparty exposure and obtain collateral when appropriate. Moreover, the company has operations across a broad range of businesses and a diverse customer base, with its average customer representing less than one-tenth of 1 percent of annual revenues. Additionally, approximately two-thirds of KMI’s business is conducted with customers who are end-users of the products KMI transports and stores, such as utilities, local distribution companies, refineries and large integrated firms.
Overview of Business Segments
“The Natural Gas Pipelines segment’s performance for the third quarter of 2016 was impacted by the sale of a 50 percent interest in SNG. Excluding this sale, the Natural Gas Pipeline segment’s performance was in-line with the same period during 2015. The segment benefited from an increased contribution from Tennessee Gas Pipeline (TGP), driven by expansion projects placed into service during 2015, and increased contributions from both the Hiland midstream assets and the Texas Intrastate Natural Gas Pipelines. These contributions were offset by declines attributable to reduced volumes affecting certain of our midstream gathering and processing assets, unfavorable contract renewals on Colorado Interstate Gas pipeline, and a customer contract buyout at Kinder Morgan Louisiana pipeline during 2015,” Kean said.
Natural gas transport volumes were down 1 percent compared to the third quarter last year, driven by lower throughput on the Texas Intrastate Natural Gas Pipelines due to lower Eagle Ford Shale volumes, lower throughput on Ruby Pipeline due to increased Canadian imports to the Pacific Northwest, and lower throughput on Fayetteville Express Pipeline due to lower production from the Fayetteville Shale. These declines were partially offset by higher throughput on TGP due to projects placed in service, higher throughput on NGPL due to deliveries to Sabine Pass LNG facility and to South Texas to meet demand from Mexico, and higher throughput on Citrus pipeline due to strong weather-driven demand in Florida. Natural gas gathered volumes were down 17 percent from the third quarter last year due primarily to lower natural gas volumes on multiple systems gathering from the Eagle Ford Shale and lower volumes on the KinderHawk system compared to the third quarter of 2015.
Natural gas continues to be the fuel of choice for America’s evolving energy needs, and industry experts are projecting natural gas demand increases of approximately 35 percent to over 105 billion cubic feet per day (Bcf/d) over the next 10 years. Over the last 2.8 years, KMI has entered into new and pending firm transport capacity commitments totaling 8.2 Bcf/d (1.9 Bcf/d of which is existing, previously unsold capacity). Of the natural gas consumed in the United States, about 38 percent moves on KMI pipelines. KMI expects future natural gas infrastructure opportunities will be driven by greater demand for gas-fired power generation across the country, liquefied natural gas (LNG) exports, exports to Mexico and continued industrial development, particularly in the petrochemical industry. In fact, natural gas deliveries on KMI pipelines to gas-fired power plants, to Mexico and to LNG facilities were up 9 percent, 6 percent, and approximately 346,000 dekatherms per day (Dth/d), respectively, compared to the third quarter of 2015.
“The CO2 segment was impacted by lower commodity prices, as our realized weighted average oil price for the quarter was $62.12 per barrel compared to $74.18 per barrel for the third quarter of 2015,” Kean said. “Combined oil production across all of our fields was down 5 percent compared to 2015 on a net to Kinder Morgan basis, primarily driven by lower SACROC production. Third quarter 2016 net NGL sales volumes of 10.6 thousand barrels per day (MBbl/d) was consistent with volumes in the same period in 2015. Net CO2 volumes increased 3 percent versus the third quarter of 2015. We continued to offset some of the impact of lower commodity prices by generating cost savings across our CO2 business.”
Combined gross oil production volumes averaged 53.7 MBbl/d for the third quarter, down 6 percent from 57.3 MBbl/d for the same period in 2015. SACROC’s third quarter gross production was 11 percent below third quarter 2015 results, and Yates gross production was 6 percent below third quarter 2015 results. Both decreases were partially driven by project deferrals during 2016. Third quarter gross production from Katz, Goldsmith and Tall Cotton was 16 percent above the same period in 2015, but below plan. KMI had record high gross NGL production of 21.7 MBbl/d for the quarter and is on track for record annual NGL production. The average West Texas Intermediate unhedged crude oil price for the third quarter was $44.94 per barrel versus $46.43 for the third quarter of 2015.
“The Terminals segment experienced strong performance at our liquids terminals, which comprise more than 75 percent of the segment’s business. Growth in the liquids business during the quarter versus the third quarter of 2015 was driven by increased contributions from our Jones Act tankers, our refined products terminals joint venture with BP and various expansions across our network,” Kean said. The Lone Star State, Magnolia State, Garden State and Bay State tankers were delivered in December 2015, May 2016, July 2016 and September 2016, respectively. These tankers are each contracted with major energy customers under long-term, firm time charters.
Growth from the liquids terminals was partially offset by a decline in the bulk terminals as compared to the same period in 2015, largely driven by the bankruptcies of Arch Coal and Peabody Energy.
“The Products Pipelines segment was favorably impacted by the startup of the second petroleum condensate processing facility along the Houston Ship Channel during 2015, and favorable performance in our Transmix business compared to 2015 due to unfavorable market price impacts during the third quarter of 2015,” Kean said.
Total refined products volumes were up 3 percent for the third quarter versus the same period in 2015. NGL volumes were down 1 percent from the same period last year. Crude and condensate pipeline volumes were up 6 percent from the third quarter of 2015 primarily due to higher volumes on Double H and KMCC.
Kinder Morgan Canada contributions were up slightly in the third quarter of 2016 compared to the third quarter of 2015.
Natural Gas Pipelines
- On Sept. 1, 2016, KMI and Southern Company closed on the previously announced joint venture transaction involving Southern Company’s acquisition of a 50 percent equity interest in SNG. As previously announced, Kinder Morgan will continue to operate the system, and the companies are pursuing specific growth opportunities to develop additional natural gas infrastructure for the strategic venture. Including SNG’s existing debt and cash consideration for Southern Company’s 50 percent share of the equity interest, the transaction implies a total enterprise value for SNG of approximately $4.15 billion.
- On June 1, 2016, Elba Liquefaction Company and Southern LNG Company received FERC authorization for the Elba Liquefaction Project. As expected, requests for rehearing were filed by the Sierra Club and associated individuals and are currently pending before the FERC. Construction will begin on Nov. 1, 2016. The approximately $2 billion project will be constructed and operated at the existing Elba Island LNG Terminal near Savannah, Georgia. Initial liquefaction units are expected to be placed in service in mid-2018, with final units coming on line by early 2019. The project is supported by a 20-year contract with Shell. In 2012, the Elba Liquefaction Project received authorization from the Department of Energy to export to Free Trade Agreement (FTA) countries. An application to export to non-FTA countries is pending, but is not required for the project to move ahead. The project is expected to have a total capacity of approximately 2.5 million tonnes per year of LNG for export, equivalent to approximately 350 million cubic feet per day of natural gas.
- Construction continues for Elba Express Company (EEC) and SNG facilities that will provide additional gas supplies for industrial customers and utilities in Georgia and Florida, and serve the Elba Island liquefaction facility. On June 1, 2016, FERC also issued certificates for both the EEC Modification Project and the SNG Zone 3 Expansion Project. These projects, which are supported by long-term customer contracts, total $302 million. The FERC approved the start of construction in late June, and the EEC and SNG facilities are expected to be placed in service beginning late in the fourth quarter of 2016.
- On Sept. 6, 2016, the FERC issued separate certificate orders approving TGP’s Broad Run Expansion and Susquehanna West Projects:
- Pending receipt of all required permits, TGP plans to begin construction of the Broad Run Expansion Project in December 2016 and place the project facilities in service on or before June 1, 2018. The project will provide an incremental 200,000 Dth/d of firm transportation capacity along the same capacity path (West Virginia to delivery points in Mississippi and Louisiana) as the Broad Run Flexibility Project, which was placed in service on Nov. 1, 2015 and provided an incremental 590,000 Dth/d of capacity. In 2014, Antero Resources Corporation was awarded a total of 790,000 Dth/d of 15-year firm capacity under the two projects. Estimated capital expenditures for the combined projects are approximately $800 million.
- Pending receipt of all required permits, TGP plans to begin construction of the $156 million Susquehanna West Project in early 2017, and place the project facilities in service on or before Nov. 1, 2017. The project will provide 145,000 Dth/d of additional capacity to an interconnection with National Fuel Supply in Potter County, Pennsylvania, and is fully subscribed by StatOil Natural Gas LLC.
- TGP continues to seek the remaining permits required for the start of construction of its FERC-approved $93 million Connecticut Expansion project, which will upgrade portions of TGP’s existing system in New York, Massachusetts and Connecticut, and provide approximately 72,100 Dth/d of additional firm transportation capacity for three local distribution company customers. Due to state and federal permit delays, the project’s original in-service date of Nov. 1, 2016, has been changed to Nov. 1, 2017.
- TGP completed construction on the last phase of its $230 million, 500,000 Dth/d South System Flexibility Project on schedule and placed the final capacity increment in service on Oct. 1, 2016. The project, which is supported by long-term contracts, provides incremental supply access from TGP’s Station 87 Pool in Tennessee to delivery points in South Texas.
- On Sept. 29, 2016, the FERC issued an Environmental Assessment for TGP’s proposed $178 million, 900,000 Dth/d Southwest Louisiana Supply Project, which is designed to serve the Cameron LNG export complex. The project, which is supported by long-term contracts, is expected to be placed in service by Feb. 1, 2018.
- On Aug. 1, 2016, NGPL filed an application with the FERC for facilities associated with its approximately $212 million Gulf Coast Southbound Expansion Project. The project, which is fully subscribed under long-term customer contracts, is designed to transport 460,000 Dth/d of incremental firm transportation service from NGPL’s interstate pipeline interconnects in Illinois, Arkansas and Texas to points south on NGPL’s pipeline system to serve growing demand in the Gulf Coast area. Pending regulatory approvals, the project is expected to be fully in service by the fourth quarter of 2018.
- Construction is nearing completion on NGPL’s Chicago Market Expansion project. This approximately $74 million project will increase NGPL’s capacity by 238,000 Dth/d and provide transportation service on its Gulf Coast mainline system from the Rockies Express Pipeline interconnection in Moultrie County, Illinois, to points north on NGPL’s system. NGPL has executed binding agreements with four customers for incremental firm transportation service to markets near Chicago and the project is expected to be placed in service on Nov. 1, 2016.
- Phase 1 of the Texas Intrastate Natural Gas system’s Crossover project was placed in service on Sept. 1, 2016, as planned. Phase 1 provides transportation capacity to serve customers in Texas and Mexico and is supported by commitments of over 800,000 Dth/d, including contracts with Cheniere Energy, Inc. at its Corpus Christi LNG facility (once the facility is placed in service) and with Comisión Federal de Electricidad (CFE). Work continues on Phase 2 of the project, which is supported by a long-term commitment from SK E&S LNG, LLC for service to the Freeport LNG export facility. Phase 2 is expected to go into service in late 2018 and will bring the total project capacity to over 1,100,000 Dth/d. The total cost for both phases is approximately $326 million.
- Construction is nearing completion on the northern portion of the Cortez Pipeline expansion project. The approximately $226 million project will increase CO2 transportation capacity on the Cortez Pipeline from 1.35 Bcf/d to 1.5 Bcf/d. The pipeline transports CO2 from southwestern Colorado to eastern New Mexico and West Texas for use in enhanced oil recovery projects. The third of five facilities was placed into service in the third quarter of 2016, with the final two facilities expected to be in service by the end of the year.
- We continue to find high-return enhanced oil recovery projects in the current price environment across the portfolio and have benefited from cost savings in our operations and in our expansion capital program.
- Construction is nearly complete on the second of two new deep-water liquids berths being developed along the Houston Ship Channel, with in-service expected in the fourth quarter of this year. The first dock was placed in service at the end of March 2016. The docks, which are pipeline-connected to Kinder Morgan’s Pasadena and Galena Park terminals via three cross-channel lines, are capable of loading ocean-going vessels at rates up to 15,000 barrels per hour. The approximately $72 million project is a response to customers’ growing demand for waterborne outlets for refined products along the ship channel, and is supported by firm vessel commitments from existing customers at the Galena Park and Pasadena terminals.
- Construction continues at the Base Line Terminal, a new crude oil storage facility being developed in Edmonton, Alberta. In March 2015, Kinder Morgan and Keyera Corp. announced the new 50-50 joint venture terminal and entered into long-term, firm take-or-pay agreements with strong, creditworthy customers to build 12 tanks with total crude oil storage capacity of 4.8 million barrels. KMI’s investment in the joint venture terminal is approximately CAD$372 million. Commissioning is expected to begin in the first quarter of 2018.
- Work continues on the Kinder Morgan Export Terminal (KMET) along the Houston Ship Channel. The approximately $245 million project includes 12 storage tanks with 1.5 million barrels of storage capacity, one ship dock, one barge dock and cross-channel pipelines to connect with Kinder Morgan’s Galena Park terminal. KMET is anticipated to be in service in the first quarter of 2017.
- In July and September 2016, Kinder Morgan’s American Petroleum Tankers (APT) took delivery of the Garden State and Bay State, respectively, the third and fourth of five 50,000-deadweight-ton product tankers from General Dynamics’ NASSCO Shipyard in San Diego, California. Each of the ECO class vessels, with cargo capacities of 330,000-barrels and LNG conversion ready engine capabilities, is fixed under long-term, firm time charters with major energy companies. The construction programs at NASSCO and Philly Shipyard, Inc. remain on-budget and substantially on-time. Five additional vessels are scheduled to be delivered through the end of 2017, bringing APT’s best-in-class fleet to 16 vessels.
- In August 2016, Kinder Morgan placed in service three 100,000 barrel tanks at its Carteret, New Jersey terminal.