Strong Financial Performance Despite Non-cash Tax Cuts & Jobs Act Charge
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 fourth quarter ($0.50 annualized) payable on February 15, 2018, to common stockholders of record as of the close of business on January 31, 2018. KMI continues to expect to increase its dividend to $0.80 per share for 2018 ($0.20 per share for Q1 2018). KMI also continues to expect to use cash in excess of dividend payments to fully fund growth investments, further strengthening its balance sheet.
“Kinder Morgan thrived in 2017. We had very good financial performance despite facing continued strong headwinds (including an epic rain event), we strengthened the balance sheet beyond our original projections, and we announced our plan to return value to shareholders through an increasing dividend and a $2 billion share repurchase program. Our previously announced 2018 guidance, with $0.80 dividends to be declared for 2018, and the early start to our share repurchases, which we began in December 2017, shows our commitment to that plan. We are highly confident in our ability to maintain robust dividend coverage while delivering a substantial dividend increase to stockholders out of operating cash flows in excess of growth capital. And of course we will continue the important work of strengthening our balance sheet by funding all growth capital through operating cash flows with no need for external funding for growth capital for the third straight year,” said Richard D. Kinder, Executive Chairman.
President and CEO Steve Kean said, “During 2017 we completed the Elba Liquefaction Project joint venture and the IPO of our Canadian pipelines and terminals assets (KML). Those transactions helped us outperform our original target for strengthening our balance sheet, leading to a year-end 2017 Net Debt-to-Adjusted EBITDA ratio of 5.1 times versus our plan of 5.4 times. We are committed to achieving or beating our longer term leverage target of 5.0 times. We also placed almost $1.8 billion of projects in service throughout the year and added a substantial additional natural gas project in Gulf Coast Express. We had good commercial and operating performance, slightly exceeding our plan for the year. We are pleased with the strength and resiliency of the company’s business and with our operational performance.”
“We also had a solid fourth quarter, but because of a non-cash accounting charge resulting from the reduction in corporate income tax rates, we are showing a fourth quarter loss of $0.47 in earnings per common share. While the recently enacted Tax Cuts and Jobs Act of 2017 will ultimately be moderately positive for KMI, the reduced corporate income tax rate causes certain deferred-tax assets to be revalued at 21 percent versus 35 percent. Although there is no impact to the underlying related deductions, which can continue to be used to offset future taxable income, KMI will take an estimated approximately $1.4 billion non-cash accounting charge for the 4th quarter. This charge is our initial estimate and may be refined in the future as permitted by recent guidance from the Securities and Exchange Commission and the Financial Accounting Standards Board. The positive impacts of the law include the reduced corporate income tax rate and the fact that several of our U.S. business units (essentially all but our interstate natural gas pipelines) will be able to deduct 100 percent of their capital expenditures through 2022. The net impact results in postponing the date when KMI becomes a federal cash taxpayer by approximately one year, to beyond 2024,” continued Kean.
For the quarter, we achieved distributable cash flow (DCF) of $0.53 per common share, representing 4 percent growth over the fourth quarter of 2016, resulting in $910 million of excess DCF above our dividend. The discrepancy between a reported net income loss and a DCF gain illustrates why we and those who follow our businesses view the DCF metric as an important measure of our financial performance.”
Kean added, “We continue to drive future growth by completing significant infrastructure development projects that we track as part of our project backlog. Our current project backlog is essentially flat with last quarter at $11.8 billion, with a small decrease primarily due to projects going into service, which was mostly offset by the addition of our Gulf Coast Express joint venture. 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 fourth quarter net loss available to common stockholders of $1,045 million, compared to net income available to common stockholders of $170 million for the fourth quarter of 2016, and DCF of $1,190 million, up 4 percent from $1,147 million for the comparable period in 2016. The increase in DCF was driven by greater contributions from the Natural Gas, Terminals and Products Pipelines Business Units, as well as from Kinder Morgan Canada, partially offset by decreased contributions from CO2. Net income available to common stockholders was impacted by a $1,276 million unfavorable change in total Certain Items (as described under “Non-GAAP Financial Measures” below) compared to the fourth quarter of 2016. Fourth quarter 2017 Certain Items were driven largely by the non-cash accounting charge resulting from the 2017 Tax Cuts and Jobs Act as previously discussed.
For the full year, KMI reported net income available to common stockholders of $27 million, versus $552 million for 2016, and DCF of $4,482 million ($2.00 per share) that was down slightly from $4,511 million for the comparable period in 2016. The decrease in DCF was driven by the sale of 50 percent of Southern Natural Gas (SNG) in 2016, negative impacts of Hurricane Harvey, a contribution to KMI’s pension plan, and the KML IPO, partially offset by increased contributions from the Terminals Business Unit, growth projects in the Natural Gas Business Unit, lower interest expense, and lower general and administrative expenses. Excluding the impact of Hurricane Harvey, the SNG sale and the KML IPO, DCF was up over 1 percent from 2016. Net income available to common stockholders was also impacted by a $512 million increase in total Certain Items compared to 2016. Certain Items in 2017 were driven by the revaluation of certain deferred-tax assets described above, partially offset by asset impairment charges taken during 2016.
For 2018, KMI’s budget is set to declare dividends of $0.80 per common share, achieve DCF of approximately $4.57 billion ($2.05 per common share) and Adjusted EBITDA of approximately $7.5 billion. KMI also budgeted to invest $2.2 billion in growth projects during 2018 (excluding growth capital expected to be funded by KML), to be funded with internally generated cash flow without the need to access equity markets, and to end the year with a Net Debt-to-Adjusted EBITDA ratio of approximately 5.1 times.
KMI previously announced it will further enhance shareholder value through a $2 billion share buy-back program. KMI’s Board of Directors authorized the program to begin in December 2017, and during that month KMI repurchased approximately 14 million shares for approximately $250 million. In 2018, KMI plans to further utilize this program opportunistically.
KMI does not provide budgeted net income attributable to common stockholders (the GAAP financial measure most directly comparable to DCF and Adjusted EBITDA) due to the inherent difficulty and impracticality of predicting 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’s expectations assume average annual prices for West Texas Intermediate (WTI) crude oil of $56.50 per barrel and Henry Hub natural gas of $3 per MMBtu, consistent with forward pricing during the company’s budget process. The vast majority of cash KMI generates is fee-based and therefore not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, with the majority of the segment’s next 12 months of oil and NGL production hedged to minimize this sensitivity. The segment is currently hedged for 31,419 barrels per day (Bbl/d) at $59.58/Bbl in 2018; 17,401 Bbl/d at $54.85/Bbl in 2019; 9,300 Bbl/d at $52.86/Bbl in 2020; and 4,300 Bbl/d at $51.92/Bbl in 2021. For 2018, KMI estimates that every $1 per barrel change in the average West Texas Intermediate crude oil price from the company’s budget of $56.50 would impact budgeted DCF by approximately $7 million and each $0.10 per MMBtu change in the price of natural gas from the company’s budget of $3 per MMBtu would impact budgeted DCF by approximately $1 million.
Overview of Business Segments
“The Natural Gas Pipelines segment’s performance for the fourth quarter of 2017 was 4 percent higher relative to the fourth quarter of 2016. The segment benefited from increased contributions from Tennessee Gas Pipeline (TGP), driven by incremental short-term capacity sales and projects placed in service; from Natural Gas Pipeline of America (NGPL) due to lower interest expense; from the Elba Express pipeline resulting from the completion of expansion projects; from SNG due to completion of an expansion project and lower interest expense; and from Hiland Midstream due to increased gathering volumes and the effect of renegotiated contracts. These benefits were partially offset by lower contributions from certain midstream gathering and processing assets and from Colorado Interstate Gas Company (CIG) as a result of a 2016 rate case settlement,” Kean said.
Natural gas transport volumes were up 8 percent compared to the fourth quarter of 2016, driven by higher throughput on TGP and Elba Express due to projects placed in service, on NGPL due to incremental demand from LNG facilities and to Mexico, and on El Paso Natural Gas (EPNG) due to additional Permian capacity sales. The increases were partially offset by lower throughput on Cheyenne Plains due to mild weather and fuel switching to coal in the Rockies market. Natural gas gathering volumes were down 2 percent from the fourth quarter of 2016 due primarily to lower natural gas volumes on multiple systems gathering from the Eagle Ford Shale and on the KinderHawk system, partially offset by increases in Hiland and Altamont volumes due to increased drilling activities in the basins.
Natural gas is critical to the American economy and to meeting the world’s evolving energy and manufacturing needs. Objective analysts project U.S. natural gas demand, including net exports of liquefied natural gas (LNG) and net exports to Mexico, will increase by more than 30 percent to approximately 105 billion cubic feet per day (Bcf/d) by 2027. Of the natural gas consumed in the U.S., about 40 percent moves on KMI pipelines. While a substantial majority of natural gas is consumed in industrial, commercial and residential heating uses, KMI expects future natural gas infrastructure opportunities will also be driven by greater demand for gas-fired power generation across the country, LNG exports, exports to Mexico, and continued industrial development, particularly in the petrochemical industry. Compared to the fourth quarter of 2016, natural gas deliveries on KMI pipelines to Mexico were up 6 percent, and deliveries to the Sabine Pass LNG facility increased by 33 percent. KMI transports roughly 70 percent of all U.S. natural gas exports destined for Mexico.
“The CO2 segment was impacted by lower commodity prices, as our realized weighted average oil price for the quarter was $59.32 per barrel compared to $62.30 per barrel for the fourth quarter of 2016,” Kean said. “Combined oil production across all of our fields was up 2 percent compared to 2016 on a net to Kinder Morgan basis. Fourth quarter 2017 net NGL sales volumes of 10.1 thousand barrels per day (MBbl/d) were down 3 percent from 2016, due to an operational interruption during the quarter.”
Combined gross oil production volumes averaged 54.1 MBbl/d for the fourth quarter, up 1 percent from 53.5 MBbl/d for the same period last year. SACROC’s fourth quarter gross production was 1 percent above fourth quarter 2016 results and slightly above 2017 budget, and Yates gross production was 5 percent below fourth quarter 2016 results and below plan. Fourth quarter gross production from Katz, Goldsmith and Tall Cotton was 18 percent above the same period in 2016, but below plan. Gross NGL sales volumes were 20.5 MBbl/d during the quarter, 4 percent below fourth quarter 2016. Southwest Colorado and the Cortez Pipeline set annual records in 2017.
“The Terminals segment earnings contributions were up 4 percent compared to the fourth quarter of 2016 despite several divestitures and a negative impact on earnings associated with Hurricane Harvey.
“Growth in the liquids business during the quarter versus the fourth quarter of 2016 was primarily driven by increased contributions from our Jones Act tankers, including the fourth quarter delivery of our final new-build tanker, the American Pride, as well as various expansions across our network, including the Kinder Morgan Export Terminal and the Pit 11 project at our Pasadena Terminal, which combined added 3.5 million barrels of storage to our best-in-class refined products storage hub along the Houston Ship Channel,” Kean said.
A 9 percent increase in the bulk business during the quarter versus the fourth quarter of 2016 was attributable primarily to increased volumes and earnings from our petroleum coke and steel handling activities that more than offset the impact of various non-core asset divestitures.
“The Products Pipelines segment contributions were up 2 percent compared with fourth quarter 2016 performance due largely to increased contributions from SFPP, CalNev, and Kinder Morgan Southeast Terminals,” Kean said.
Total refined products volumes were up 4 percent for the fourth quarter versus the same period in 2016. Crude and condensate pipeline volumes were up 2 percent from the fourth quarter of 2016.
Kinder Morgan Canada contributions were up 22 percent in the fourth quarter of 2017 compared to the fourth quarter of 2016. This was largely due to higher capitalized equity financing costs associated with spending on the Trans Mountain Expansion Project, timing of operating costs, and foreign exchange effects driven by a stronger Canadian dollar in 2017.
Natural Gas Pipelines
- Substantial progress is being made on the nearly $2 billion Elba Liquefaction Project as construction is well underway. The federally approved liquefaction project at the existing Southern LNG Company facility at Elba Island near Savannah, Georgia, is supported by a 20-year contract with Shell. Total liquefaction capacity will be approximately 2.5 million tonnes per year of LNG, equivalent to approximately 350 million cubic feet per day of natural gas. Initial in-service is expected in mid-2018 with final units coming on line by mid-2019. Elba Liquefaction Company, L.L.C. (ELC), a KMI joint venture with EIG Global Energy Partners as a 49 percent partner, will own 10 liquefaction units and other ancillary equipment. Certain other facilities associated with the project are 100 percent owned by KMI. Additional upstream compression facilities are being constructed by a KMI affiliate at two compressor stations on the Elba Express pipeline to facilitate transportation of ample feed gas for liquefaction.
- On Dec. 21, 2017, Kinder Morgan Texas Pipeline (KMTP), DCP Midstream and an affiliate of Targa Resources Corp. announced their final investment decision to proceed with the Gulf Coast Express Pipeline Project (GCX Project) after having executed definitive joint venture agreements and having secured sufficient firm transportation agreements with shippers. Approximately 85 percent of the project capacity is subscribed and committed under long-term, binding transportation agreements, and the partners expect that the remaining capacity will be subscribed by early 2018. The approximately $1.7 billion GCX Project is designed to transport up to 1.92 billion cubic feet per day (Bcf/d) of natural gas from the Permian Basin to the Agua Dulce, Texas, area. The project is expected to be in service in October 2019, pending the receipt of necessary regulatory approvals. As previously announced, KMTP will build, operate and own a 50 percent interest in the GCX Project, and DCP Midstream and Targa will each hold a 25 percent equity interest in the project. In addition to their transportation agreements, shipper Apache Corporation has an option to purchase up to a 15 percent equity stake in the project from KMI.
- On Nov. 20, 2017 and Dec. 15, 2017, the FERC issued two Certificates of Public Convenience and Necessity to:
- Kinder Morgan Louisiana Pipeline (KMLP) for its proposed project to provide 600,000 Dth/d of capacity to serve Train 5 at Cheniere’s Sabine Pass LNG Terminal. The approximately $122 million KMLP project is expected to be placed into commercial service as early as the first quarter of 2019, earlier than initially planned, and
- TGP for its Lone Star Project. The approximately $150 million project will provide 300,000 Dth/d of capacity under a long-term contract to Cheniere’s planned Corpus Christi Liquefaction Project in South Texas and is anticipated to be placed into commercial service in January 2019.
- Construction is nearly complete on the approximately $178 million Southwest Louisiana Supply Project, and it is expected to be placed into commercial service with initial deliveries beginning in the first quarter of 2018. The project will provide 900,000 Dth/d of capacity to the Cameron LNG export facility in Cameron Parish, Louisiana.
- Three fully-subscribed TGP projects were made available for service in the fourth quarter of 2017:
- The approximately $104 million Connecticut Expansion Project provides 72,100 Dth/d of capacity for three local distribution company customers in the Northeast. Deliveries under the long-term contracts began in the fourth quarter of 2017.
- The approximately $104 million Orion Project provides 135,000 Dth/d of capacity for three customers. Deliveries under the long-term contracts began in the fourth quarter of 2017.
- The approximately $57 million Triad Project provides 180,000 Dth/d of capacity for one customer. Deliveries under the long-term contract will begin on June 1, 2018.
- On Dec. 21, 2017, Sierrita Gas Pipeline, LLC filed a Certificate Application with the FERC for its approximately $56 million Sierrita Gas Pipeline Expansion. This expansion project will increase the Sierrita pipeline’s capacity by approximately 323,000 Dth/d to 524,000 Dth/d and consists of a new 15,900 horsepower compressor station in Pima County, Arizona. Pending regulatory approvals, the project is expected to be placed into service in the second quarter of 2020. KMI is a 35 percent owner and the operator of Sierrita Gas Pipeline.
- On Nov. 8, 2017, NGPL received a Certificate of Public Convenience and Necessity for its approximately $212 million Gulf Coast Southbound Expansion Project, and construction is underway following receipt of FERC’s Notice to Proceed. The project, which is fully subscribed under long-term 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. The project is anticipated to be fully in service by the fourth quarter of 2018.
- On Nov. 27, 2017, the FERC approved Wyoming Interstate Company, LLC’s Offer of Settlement in a proceeding pursuant to Section 5 of the Natural Gas Act, and on Jan. 5, 2018, the FERC approved NGPL’s Offer of Settlement in a separate proceeding pursuant to Section 5 of the Natural Gas Act. These settlements will not have a material adverse impact on KMI’s results of operations or cash flows from operations.
- The approximately $66 million second phase of KMI’s Tall Cotton field project is more than 90 percent complete and the field is experiencing continued strong production results of approximately 3,000 Bbls/d of oil. Tall Cotton is the industry’s first greenfield Residual Oil Zone CO2 project, marking the first time CO2 has been used for enhanced oil recovery in a field without a main pay zone.
- KMI continues to find high-return enhanced oil recovery projects in the current price environment across its robust portfolio of assets.
- At the Base Line Terminal, a 50-50 joint venture crude oil merchant storage terminal being developed in Edmonton, Alberta, Canada, by KML and Keyera, construction of all major facilities is materially complete, including off-site pipe rack and bridges required to connect the terminal with the North 40 Terminal, Edmonton South Terminal, and Edmonton Rail Terminal. Commissioning of the 12-tank, 4.8 million barrel new-build facility, which is fully contracted with long-term, firm take-or-pay agreements with creditworthy customers, is underway, and the first 4 tanks were placed into service in January 2018 with the balance to be phased into service throughout the year. KMI and KML’s investment in the joint venture terminal is approximately C$398 million, including costs associated with the construction of a pipeline segment funded solely by KML. The project is forecast to be on schedule and on budget.
- Construction is complete on the Pit 11 expansion project at KMI’s Pasadena terminal. The approximately $186 million project, back-stopped by long-term commitments from existing customers, adds 2.0 million barrels of storage to KMI’s best-in-class refined products storage hub along the Houston Ship Channel.
- On Nov. 20, 2017, KMI’s American Petroleum Tankers (APT) took delivery of its final product tanker, the American Pride, from Philly Shipyard, Inc. (PSI) and later in the fourth quarter placed the vessel on-hire pursuant to a term charter agreement with a major refiner. APT’s construction program at PSI is complete following the delivery of the final tanker, bringing APT’s best-in-class fleet to 16 vessels. The entire fleet, including each of the 330,000-barrel capacity and LNG conversion-ready new-build tankers, is fixed under charter with major energy companies.
- Construction is nearing completion on the $550 million Utopia Pipeline Project, and the pipeline is expected to be placed in service in January 2018. With an initial design capacity of 50,000 Bbls/d, the 267-mile Utopia Pipeline transports ethane from Ohio to Windsor, Ontario, Canada. The project is fully supported by a long-term, fee-based transportation agreement with a petrochemical customer.
Kinder Morgan Canada
- On Dec. 15, 2017, KML completed its offering of cumulative redeemable minimum rate reset preferred shares, Series 3 (the “Series 3 Preferred Shares”) for aggregate gross proceeds of $250 million. KML issued 10 million Series 3 Preferred Shares with a coupon rate of 5.20 percent, including 2 million Series 3 shares issued due to the full exercise of the underwriter’s option, as a result of strong investor demand. KML ended the year with no outstanding debt by carefully managing funds while seeking clarity on the remaining permitting, regulatory and judicial review processes for TMEP.
- On Dec. 4, 2017, KML announced that TMEP had made incremental progress during 2017 on permitting, regulatory condition satisfaction and land access.