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.
2016 Outlook
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.
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