Kinder Morgan, Inc. today announced results for the third quarter of 2019:
- 13 percent year-over-year growth in natural gas transport volumes, the seventh consecutive quarter to exceed 10 percent growth
- $506 million or $0.22 per share of net income available to common stockholders
- $1.14 billion or $0.50 per share of distributable cash flow (DCF)
- $571 million of excess DCF above declared dividend
- Year-to-date 2019 Adjusted EBITDA effectively flat to 2018 despite Trans Mountain sale
- Announced agreement to sell U.S. portion of Cochin pipeline and 70 percent interest in KML
KMI’s board of directors approved a cash dividend of $0.25 per share for the third quarter ($1.00 annualized) payable on November 15, 2019, to common stockholders of record as of the close of business on October 31, 2019. KMI is reporting third quarter net income available to common stockholders of $506 million, compared to $693 million in the third quarter of 2018; and DCF of $1,140 million, a 4 percent increase over the third quarter of 2018.
“The dividend we announce today represents a 25 percent increase over the fourth quarter 2018 dividend, as we continue to deliver on the dividend growth plan we outlined two years ago,” said Richard D. Kinder, Executive Chairman.
“The third quarter was a momentous one for Kinder Morgan, as we placed two major projects into service. Our Gulf Coast Express Pipeline (GCX) went in service on September 25th, ahead of schedule. GCX will play a significant role in reducing flaring in West Texas by providing an outlet for associated gas produced in the Permian,” said Chief Executive Officer Steve Kean. “In addition to being ahead of schedule, the project managed six million contractor hours worked with an outstanding safety record.”
Kean continued, “Also late in September, the first of ten liquefaction units of the Elba Liquefaction project went in commercial service, upon which we began recognizing approximately 70 percent of the full project revenues. Startup activities are underway on units two and three; units four through six are in the commissioning phase; and construction on the remaining units is largely complete.”
“We also continued to maintain fiscal discipline by funding growth capital through operating cash flows without accessing capital markets, as we have been doing since the first quarter of 2016,” concluded Kean.
“With U.S. natural gas production continuing to set records in 2019, our Natural Gas Pipelines segment once again led the way for strong company-wide commercial, financial, and operating performance in the third quarter,” said KMI President Kim Dang. “We generated third quarter earnings per common share of $0.22, compared to $0.31 in the third quarter of 2018. The third quarter of 2018 included the recognition of the gain on the Trans Mountain sale. Adjusted Earnings per share in the third quarter of 2019 were up 5 percent compared to the third quarter of 2018. At $0.50 per common share, DCF per share was up $0.01 from the third quarter of 2018, with $571 million of excess DCF above our declared dividend.
“We also made excellent progress on our Permian Highway Pipeline project, with nearly 85 percent of the right-of-way secured along the route and construction activities underway on the western spread. Given the slower than anticipated pace of regulatory approvals, the project is now expected to be in service early in 2021. As with GCX, this project is critical to the development of resources and the reduction of flaring in the Permian Basin,” continued Dang.
As noted above, KMI reported third quarter net income available to common stockholders of $506 million, compared to $693 million for the third quarter of 2018, and DCF of $1,140 million, up from $1,093 million for the comparable period in 2018. Net income was down year-over-year due to the recognition of the gain from the Trans Mountain sale in the third quarter of 2018. The DCF increase was due to greater contributions from the Natural Gas Pipelines and Products Pipelines segments and lower preferred dividend payments, partially offset by lower commodity prices and volumes impacting our CO2 segment and the elimination of the Kinder Morgan Canada business segment following the Trans Mountain sale.
KMI’s project backlog at the end of the third quarter stood at $4.1 billion, $1.6 billion less than at the end of the second quarter of 2019, due to placing Elba Liquefaction and GCX in service. While the overall backlog has been reduced as a result of several large projects coming into service, we have added approximately $1.2 billion of projects year-to-date, primarily in the Natural Gas Pipelines segment. Excluding the CO2 segment projects (where we have higher return thresholds than our other projects), KMI expects projects in the backlog to generate an average Project EBITDA multiple of approximately 6.0 times.
For the first nine months of 2019, KMI reported net income available to common stockholders of $1,580 million, compared to $998 million for the first nine months of 2018, and DCF of $3,639 million, up 5 percent from $3,457 million for the comparable period in 2018. Net income for the first nine months improved year-over-year due primarily to non-recurring impairments (net of divestiture gains) in 2018 and lower interest expense and preferred share dividends in 2019. DCF for the first nine months benefited from contributions from the Natural Gas Pipelines segment, lower preferred dividend payments and lower interest expense, partially offset by reduced contributions from the CO2 segment and the elimination of the Kinder Morgan Canada business segment following the Trans Mountain sale.
For 2019, KMI’s budget contemplates declared dividends of $1.00 per common share, DCF of approximately $5.0 billion ($2.20 per common share) and Adjusted EBITDA of approximately $7.8 billion. Adjusted EBITDA is currently estimated to be approximately 3 percent below budget, primarily due to the delay in Elba’s in-service date, lower commodity prices and volumes impacting the CO2 segment, and the impact of 501-G settlements, partially offset by the strong performance of the West Region Natural Gas Pipelines segment. While not budgeted due to uncertainty as to their timing, the 501-G settlements were in-line with what KMI had previously communicated to the market in 2019. The resolution of those matters is a positive outcome as it reduces rate uncertainty. DCF is expected to be slightly below budget as lower than budgeted interest expense partially offsets the lower Adjusted EBITDA. KMI budgeted to invest $3.1 billion in growth projects and contributions to joint ventures during 2019. KMI now expects to spend approximately $2.8 billion due primarily to lower capital expenditures in the CO2 segment. KMI expects to use internally generated cash flow to fund the vast majority of its 2019 discretionary spending, without the need to access equity markets. As mentioned last quarter, due to the Adjusted EBITDA impact discussed above, KMI now expects to end 2019 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times.
KMI expects to close the previously-announced sale of the U.S. portion of Cochin for approximately $1.546 billion and its 70 percent interest in Kinder Morgan Canada Limited (KML) to Pembina Pipeline Corporation (Pembina) for approximately 25 million shares of Pembina common stock late in the fourth quarter of 2019 or in the first quarter of 2020, subject to customary closing conditions, including KML shareholder and applicable regulatory approvals. While KMI expects to ultimately convert these shares into cash, the company plans to do so in an opportunistic and non-disruptive manner. Conversion of the Pembina shares to cash at the September 30, 2019 closing price for Pembina of C$49.11 would yield pre-tax proceeds of approximately US$927 million. KMI expects to use the proceeds to reduce debt to maintain its targeted Net Debt-to-Adjusted EBITDA ratio at approximately 4.5 times and use any remaining proceeds to invest in attractive projects and/or to opportunistically repurchase KMI shares. With the cash proceeds from the sale of the U.S. portion of Cochin alone, if the transaction were to close at the end of 2019, KMI would expect to end 2019 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.4 times, surpassing the currently expected approximately 4.6 times year-end projection.
KMI does not provide budgeted net income available to common stockholders (the GAAP financial measure most directly comparable to DCF and Adjusted EBITDA) or budgeted metrics derived therefrom (such as the portion of net income attributable to an individual capital project, the GAAP financial measure most directly comparable to Project EBITDA) 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’s budgeted expectations assume average annual prices for West Texas Intermediate (WTI) crude oil of $60.00 per barrel and Henry Hub natural gas of $3.15 per million British Thermal Units (MMBtu), consistent with forward pricing during the company’s budget process. The vast majority of revenue 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 most of the segment’s next 12 months of combined oil and NGL production hedged to minimize this sensitivity. Further information on KMI’s CO2 segment hedges is included in the accompanying Table 5.
Overview of Business Segments
“The Natural Gas Pipelines segment’s financial performance for the third quarter of 2019 was higher relative to the third quarter of 2018,” said Dang. “The segment saw higher revenue on El Paso Natural Gas (EPNG) due to increases in its base business and expansion-related activity driven by Permian Basin demand, on Tennessee Gas Pipeline (TGP) due to projects placed in service, and on Kinder Morgan Louisiana Pipeline (KMLP) due to the Sabine Pass Expansion that went into service in December 2018. The segment also benefited from increased contributions from the Texas Intrastates on higher sales margins. These increases were partially offset by the negative impact of EPNG’s 501-G settlement.”
Natural gas transport volumes were up 13 percent compared to the third quarter of 2018, with the largest gains on EPNG, TGP and KMLP, followed by Colorado Interstate Gas Company (CIG), GCX and Wyoming Interstate Company (WIC). This constitutes the seventh quarter in a row in which volumes exceeded the previous comparable prior year period by 10 percent or more. EPNG benefited from Permian-related activity and increased throughput for California storage refill, TGP’s increase was due to projects placed in service, KMLP’s increase was due to the Sabine Pass Expansion in-service, CIG improved due to increased production in the DJ basin and increased coal-to-gas fuel switching for power generation, GCX went into service, and WIC saw higher flows from the DJ and Powder River basins. Natural gas gathering volumes were up 12 percent from the third quarter of 2018 due primarily to higher volumes on the KinderHawk, South Texas and Eagle Ford Midstream systems. NGL transport volumes were up 10 percent compared to the third quarter of 2018, due to higher Cochin volumes.
Natural gas is critical to the American economy, to meeting the world’s evolving energy needs, and to cost-effectively achieving greenhouse gas emissions reductions. Independent analysts project that U.S. natural gas demand, including exports to Mexico and net exports of liquefied natural gas (LNG) — displacing more carbon-intensive fuels — will increase from 2018 levels by 34 percent to more than 120 billion cubic feet per day (Bcf/d) by 2030, which is consistent with KMI’s own internal modeling. Of the natural gas produced in the U.S., about 40 percent moves on KMI pipelines. Analysts project that future natural gas infrastructure opportunities through 2030 will be driven by net LNG exports (forecast to increase more than five-fold), greater demand for gas-fired power generation across the country (forecast to increase by 13 percent), net exports to Mexico (forecast to rise by 57 percent), and continued industrial development (up 18 percent), particularly in the petrochemical industry.
“During the quarter, the Products Pipelines segment benefited from strong contributions from SFPP and our Bakken Crude assets that were partially offset by reduced contributions from KM Crude & Condensate Pipeline due to lower average re-contracted rates,” Dang said.
Crude and condensate pipeline volumes were up 4 percent compared to the third quarter of 2018, while total refined products volumes were up 1 percent versus the same period in 2018.
“Terminals segment earnings were down modestly this quarter compared to the third quarter of 2018. Our liquids business, which accounts for nearly 80 percent of the segment total, saw incremental contributions from expansion projects. However, this increase was offset by increased tank lease costs at the Edmonton South Terminal, paid pursuant to a lease agreement with Trans Mountain that became a third-party arrangement due to our sale of Trans Mountain, and a variety of smaller items,” said Dang.
Contributions from the Terminals segment’s bulk business were up modestly compared to the third quarter of 2018.
Although not a significant driver of financial performance in the quarter, our liquids business saw strong gains in gasoline and distillate volumes handled in key hubs along the Houston Ship Channel and New York Harbor.
“The CO2 segment was negatively impacted versus the third quarter of 2018 primarily by lower commodity prices, lower crude and NGL volumes, and higher power expense. Our weighted average NGL price for the quarter was down $15.34 per barrel, or 42 percent from the third quarter of 2018. Our realized weighted average crude oil price for the quarter was down 15 percent at $49.45 per barrel compared to $57.96 per barrel for the third quarter of 2018, largely driven by our Midland/Cushing basis hedges,” said Dang. “Third quarter 2019 combined oil production across all of our fields was down 7 percent compared to the same period in 2018 on a net to KMI basis, with declines experienced at each of our fields. Third quarter 2019 net NGL sales volumes of 10.2 thousand barrels per day were down 3 percent compared to the same period in 2018.”
Natural Gas Pipelines
- Construction activities have started on the Permian Highway Pipeline (PHP) near the Waha area in Texas, and nearly 85 percent of the right-of-way along the entire route has been secured. The approximately $2 billion project is designed to transport up to 2.1 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. Given the slower than anticipated pace of regulatory approvals, the project is expected to be in service early in 2021. The total 2.1 Bcf/d of capacity is fully subscribed under long-term, binding agreements. Kinder Morgan Texas Pipeline (KMTP), EagleClaw Midstream and Altus Midstream each hold an ownership interest of approximately 26.6 percent, and an affiliate of an anchor shipper has a 20 percent interest. KMTP will build and operate the pipeline.
- GCX was placed in full commercial operation on September 25, 2019, ahead of the October 1, 2019, target date set for the project. The approximately $1.75 billion project is designed to transport about 2.0 Bcf/d of natural gas from the Permian Basin to the Agua Dulce, Texas area, and is fully subscribed under long-term, binding agreements. KMTP owns a 34 percent interest in GCX and will operate the pipeline. Other equity holders include Altus Midstream, DCP Midstream and an affiliate of Targa Resources.
- Elba Liquefaction Company (ELC) placed the first of ten liquefaction units of the nearly $2 billion Elba Liquefaction project in service on September 30, 2019. Startup activities are underway on the second and third units, the commissioning of units four through six is ongoing, and construction on the remaining units is largely complete. With the first unit in service, ELC is now earning approximately 70 percent of the expected total daily project revenues. The facility will have a total liquefaction capacity of approximately 2.5 million tonnes per year of LNG, equivalent to approximately 350 million cubic feet per day (MMcf/d) of natural gas. The project is supported by a 20-year contract with Shell. ELC, a KMI joint venture with EIG Global Energy Partners as a 49 percent partner, will own the liquefaction units and other ancillary equipment. Certain other facilities associated with the project are 100 percent owned by KMI.
- KMI is investing more than $325 million in a collection of projects designed to increase capacity and improve connectivity across its Texas intrastate system. The Dayton Loop Project is expected to be placed in service in the first quarter of 2020 and will provide incremental takeaway capacity from the east Texas and Goodrich areas to the Houston Ship Channel, Texas City and Katy market areas. The additional projects are designed to support the distribution of significant incremental volumes as GCX, PHP and other new Permian Basin takeaway projects begin to deliver into the U.S. Gulf Coast and Mexico markets.
- Construction is nearing completion on a new 150 MMcf/d cryogenic plant in McKenzie County, North Dakota. The project is on schedule for an estimated in-service date of November 1, 2019. Approximately 275 MMcf/d of gathering capacity is also being created through pipeline and compression additions in the area. These projects are part of the approximately $450 million investment KMI is making to expand its existing natural gas gathering and processing footprint in the Williston Basin.
- Construction is underway on the approximately $56 million Sierrita Gas Pipeline Expansion Project (KMI share: approximately $20 million). This project will increase the pipeline’s capacity by approximately 323,000 dekatherms per day (Dth/d) to 524,000 Dth/d, and consists of a new 15,900 horsepower compressor station in Pima County, Arizona. This 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 September 30, 2019, the Federal Energy Regulatory Commission issued a certificate authorizing Natural Gas Pipeline Company of America, LLC (NGPL) to construct the Sabine Pass Compression Project, which is expected to be placed in service in late 2020. The approximately $68 million project (KMI’s share: approximately $34 million), supported by a long-term take-or-pay contract, will add compression capacity on NGPL’s Louisiana system in order to deliver additional natural gas to the Sabine Pass Liquefaction facility in Cameron Parish.
- On September 1, 2019, incremental capacity of 21,000 barrels per day (bpd) became available on the Baton Rouge, Louisiana to Collins, Mississippi segment of the Roanoke Expansion project. This amount of capacity was also made available earlier this year on the Collins, Mississippi to Greensboro, South Carolina segment. The full project (KMI’s share: $24.9 million) will add approximately 21,000 bpd of incremental refined petroleum products capacity on the Plantation Pipe Line system from the Baton Rouge and Collins origin points to the Roanoke area. The project consists primarily of additional pump capacity and operational storage and is currently on track to be in service by April 1, 2020.
- Kinder Morgan Crude and Condensate (KMCC) has completed its South Texas connection to the Gray Oak Pipeline (Gray Oak). This connection will provide shippers with long-term crude oil transportation for up to 100,000 bpd from Gray Oak origin points in the Permian Basin to KMCC delivery points at or near the Houston Ship Channel. Pending the full in-service of Gray Oak, KMCC expects an early in-service connection to be in operation in the fourth quarter of 2019.
- During the third quarter, KMI’s Hiland Crude system and Tallgrass Energy’s Pony Express Pipeline closed a joint tariff open season for movements from Bakken origin points to Cushing, Oklahoma. The Hiland Crude system is currently capable of moving approximately 88,000 bpd from Bakken origin points to Guernsey, Wyoming.
- KMI is investing approximately $125 million in a series of projects at its Pasadena Terminal and Jefferson Street Truck Rack, located on the Houston Ship Channel. The projects include increasing flow rates on inbound pipeline connections and outbound dock lines, tank modifications that will add 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. The improvements are supported by a long-term agreement with a major refiner and are expected to be completed by the end of the second quarter of 2020.
- KMI is also investing more than $45 million to develop and construct a butane-on-demand blending system for 25 tanks at its Galena Park Terminal. The project will include construction of a 30,000-barrel butane sphere, 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 fourth quarter of 2020.
- Construction activities continue on the distillate storage expansion project at the KML Vancouver Wharves terminal in North Vancouver, British Columbia. Material permits have been secured for the approximately C$50 million capital project, which calls for the construction of two new distillate tanks with combined storage capacity of 200,000 barrels and enhancements to the railcar unloading capabilities. The project is supported by a 20-year initial term, take-or-pay contract with an affiliate of a large, international integrated energy company and is expected to be placed in service late first quarter of 2021.
- CO2 segment capital projects continue to generate attractive returns. KMI also continues to demonstrate strong capital discipline by eliminating projects within the segment that do not meet high return requirements. This has resulted in an approximately one-third reduction in CO2 segment investments for 2019.
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 84,300 miles of pipelines and 157 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO2 and other products, and our terminals transload and store liquid commodities including petroleum products, ethanol and chemicals, and bulk products, including petroleum coke, metals and ores. For more information, please visit www.kindermorgan.com.
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