HOUSTON – Kinder Morgan, Inc.’s (NYSE: KMI) board of directors today approved a cash dividend of $0.2625 per share for the second quarter ($1.05 annualized), payable on August 17, 2020, to common stockholders of record as of the close of business on August 3, 2020. This dividend represents a 5 percent increase over the second quarter 2019.
KMI is reporting a second quarter net loss attributable to KMI of $637 million, compared to net income attributable to KMI of $518 million in the second quarter of 2019; and distributable cash flow (DCF) of $1,001 million, an 11 percent decrease from the second quarter of 2019. The net loss was primarily due to a $1,000 million non-cash impairment of goodwill associated with KMI’s natural gas non-FERC regulated midstream business driven by the recent sharp decline in natural gas production affecting a number of our assets. Without that impairment, net income for the quarter would have been $363 million.
“Despite the significant reduction in energy demand during the second quarter due to the pandemic, our company continued to generate substantial earnings and robust coverage of this quarter’s dividend,” said KMI Executive Chairman Richard D. Kinder. “While the pace of the global economic recovery remains uncertain at this time, we are seeing green shoots in some areas of our business. The board remains committed to increasing the dividend to $1.25 annualized as we projected, under far different circumstances, in 2017. The board will meet in January 2021 as usual and at that time we will have the company’s 2021 budget to help guide our decisions. In making a determination about the dividend payment, we will take into account the economic conditions prevailing and projected at that time, along with our principles of returning value to shareholders while maintaining a healthy balance sheet.”
“Protecting our employees during this historic pandemic while continuing to provide essential services to our fellow citizens remains our top priority, and I am very proud of the way our employees have responded to this challenge,” said KMI Chief Executive Officer Steve Kean. “Our teams quickly adapted to remote working and have not missed a beat in running our assets, serving our customers, generating new business and executing on projects.
“We also continue to look closely at our capital spending, our expenses, and increased operational efficiency. We have now reduced our 2020 expenses and sustaining capital expenditures by approximately $170 million combined versus our original budget without sacrificing safety and compliance. We have reduced our expansion capital outlook for 2020 by approximately $660 million, or almost 30 percent. In addition, the actions we have taken 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. The services we provide continue to be needed to meet our customers’ energy transportation and storage needs. Our business model, which secures much of our cash flows on a take-or-pay basis independent of underlying commodity prices, positions us well even in the current environment,” Kean concluded.
“Sharp declines in crude oil and natural gas production along with reduced demand for refined products due to the economic shutdown in the wake of the pandemic clearly affected our business and will continue to do so in the near term. Largely due to the non-cash impairment noted above, we generated a second quarter loss per common share of $0.28, compared to earnings per common share of $0.23 in the second quarter of 2019. Financial contributions from all of our business segments were down compared to the second quarter of 2019, although transport volumes in our Natural Gas Pipelines segment were up 3 percent year over year, and we saw lower interest expense, cash taxes and sustaining capital expenditures versus the same period last year,” said KMI President Kim Dang.
“Adjusted earnings per share in the second quarter of 2020 were down 23 percent compared to the second quarter of 2019. At $0.44 per common share, DCF per share was down $0.06 from the second quarter of 2019, yet we still achieved $404 million of excess DCF above our declared dividend.
“We continue to overcome challenges and make progress on our Permian Highway Pipeline project, with more than 75 percent of the construction completed. As previously announced, we expect the project to be in service early in 2021,” said Dang. “We are also nearing completion of the Elba Liquefaction project, with the sixth of ten liquefaction units placed in service during the quarter, and the seventh on July 17th. The remaining three units are expected to be placed in service before the end of this summer. Both projects are fully contracted under long term, reservation-based contracts.”
For the first six months of 2020, KMI reported net loss attributable to KMI of $943 million, compared to net income attributable to KMI of $1,074 million for the first six months of 2019, and DCF of $2,262 million, down 9 percent from $2,499 million for the comparable period in 2019. In addition to the effects of the pandemic on energy demand described above, our net loss for the first six months of 2020 includes $1,976 million of pre-tax net losses on impairments and divestitures as compared to a pre-tax net gain of $10 million in the comparable 2019 period.
2020 Outlook
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 now expects DCF to be below plan by slightly more than 10 percent and Adjusted EBITDA to be below plan by slightly more than 8 percent. As a result, KMI now expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.7 times. Because considerable uncertainty exists with respect to the future pace and extent of a global economic recovery from the effects of the pandemic, Table 8 below provides assumptions and sensitivities for impacts on our business over the remaining six months of 2020 that may be affected by that uncertainty.
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 expansion projects and contributions to joint ventures for 2020 to be lower by approximately $660 million. With this reduction, DCF less expansion capital expenditures is improved by over $100 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 June 30, 2020, we had over $3.9 billion of borrowing capacity under our $4 billion credit facility and $526 million in cash and cash equivalents. We believe our cash from operations, current cash on hand and excess borrowing capacity are more than adequate to allow us to manage our day-to-day cash requirements as well as the debt maturing over the next 18 months.
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 down for the second quarter of 2020 relative to the second quarter of 2019,” said Dang. “The segment experienced lower contributions from multiple gathering and processing assets due to sharply reduced natural gas production, from Tennessee Gas Pipeline Company (TGP) due to mild weather in the Northeast and the impact of the FERC 501-G rate settlement, 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 up 3 percent compared to the second quarter of 2019, with the largest increases on GCX, TGP, Colorado Interstate Gas (CIG), and the Texas Intrastates. Increases on GCX were due to its being placed in service, while TGP benefited from increased LNG deliveries, CIG from DJ growth and higher heating demand, and the Texas Intrastates from the continued growth in the Texas Gulf Coast market. Natural gas gathering volumes were down 8 percent from the second quarter of 2019 due primarily to decreased volumes on our KinderHawk, Oklahoma and Hiland Midstream systems.
“The severe decline in refined product demand and lower crude and condensate volumes during the second quarter reduced contributions from the Products Pipelines segment,” Dang said. “Crude and condensate pipeline volumes were down 26 percent compared to the prior period and total refined product volumes were down 31 percent compared to the second quarter of 2019.”
“Terminals segment earnings were lower compared to the second 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 percent of the segment, refined product volumes were down 24 percent compared to the second quarter of 2019, however the negative impact to earnings was more moderate owing to our predominantly fixed, take-or-pay contracting profile. Further, incremental storage demand driven by a contango commodity pricing environment contributed to historically-high effective utilization across our network of nearly 80 million barrels of storage capacity,” said Dang. “In our bulk business, continued strong volumes and earnings at our petroleum coke operations were more than offset by weakness in export coal, soda ash, and steel volumes.”
“The CO2 segment was negatively impacted versus the second quarter of 2019 primarily by lower crude and CO2 volumes, as well as lower NGL prices, partially offset by lower operating expenditures. Our weighted average NGL price for the quarter was down $7.74 per barrel, or 33 percent from the second quarter of 2019. Our realized weighted average crude oil price for the quarter was up 1 percent at $50.31 per barrel compared to $49.95 per barrel for the second quarter of 2019, largely driven by our Midland/Cushing basis hedges,” said Dang. “Second quarter 2020 combined oil production across all of our fields was down 13 percent compared to the same period in 2019 on a net to KMI basis.”
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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, July 22, at www.kindermorgan.com for a LIVE webcast conference call on the company’s second quarter earnings. A supplemental Investor Update presentation is also available on the same page as the webcast link.