Kinder Morgan, Inc. (NYSE: KMI) today announced its preliminary financial projections for 2020. KMI remains committed to maintaining a strong balance sheet, investing in attractive projects, and returning value to its shareholders. Further, as was demonstrated with the sale of the TransMountain system in 2018 and the pending sale of Kinder Morgan Canada Limited (TSX: KML) in 2019, KMI continues to consider attractive divestitures when they strengthen the balance sheet and improve shareholder value.
“With the expected close of Pembina’s acquisition of the Cochin pipeline and all of KML’s outstanding shares prior to the end of 2019, we expect our year-end 2019 Net Debt-to-Adjusted EBITDA ratio to improve to 4.4 times, versus our long-term target of approximately 4.5 times. We expect the ratio to further improve to 4.3 times in 2020. This is a nice improvement from our third quarter ratio of 4.7 times,” said Steve Kean, KMI chief executive officer. “In 2020, we expect to generate $5.1 billion of distributable cash flow (DCF), which is an approximately 3 percent increase over our current forecast for 2019 DCF. Our growth is a result of expansion projects coming online, built-in contract and tariff escalators, lower interest expense and improved realized prices in our CO2 business; which is partially offset by the full-year impact of the sale of Cochin and KML, the full-year impact of the rate settlements in our Natural Gas Pipelines segment, higher sustaining capital expenditures, and lower re-contracting rates on certain Natural Gas Pipeline segment assets as well as on our crude and condensate assets. Our budget guidance assumes that the proceeds from the Pembina transactions will be used to pay down debt – creating approximately $1.2 billion of balance sheet/borrowing flexibility, representing the difference between the 4.3 times and the 4.5 times target for our Net Debt-to-Adjusted EBITDA,” continued Kean.
The balance sheet/borrowing flexibility provides KMI with attractive optionality. KMI can retain that financial flexibility or use some or all of it to repurchase shares or invest in attractive projects. The company will continue to make those choices based on shareholder value. For illustrative purposes only, using the $1.2 billion for share repurchases or to invest in projects could increase the company’s DCF/share growth to 5 or 6 percent, respectively, assuming a full-year benefit from the repurchases or projects.
“We think that building this financial flexibility into our 2020 budget is the right decision for our shareholders,” said Kean.
With these factors in mind, below is a summary of KMI’s expectations for 2020:
- Generate $2.24 of DCF per share, up 3 percent compared to our current forecast for 2019, and $7.6 billion of Adjusted EBITDA.
- Return additional value to shareholders in 2020 through the previously announced dividend increase. As first stated in KMI’s second quarter 2017 earnings release, KMI expects to increase the declared dividend per common share in 2020 to $1.25 per share (annualized), beginning with $0.3125 per share for the first quarter 2020 dividend (which will be paid in the second quarter 2020). This will be a 25 percent increase from the 2019 dividend and a 150 percent increase from the 2017 dividend.
- Invest $2.4 billion in expansion projects and contributions to joint ventures in 2020. KMI expects to use internally generated cash flow to fully fund its 2020 dividend payment, as well as almost all of its 2020 discretionary spending with no need to access equity markets.
KMI does not provide budgeted net income attributable to common stockholders and net income, the GAAP financial measures most directly comparable to the non-GAAP financial measures of DCF and Net Debt-to-Adjusted EBITDA, respectively, due to the impracticality of quantifying certain components required by GAAP such as: ineffectiveness of 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 the average annual prices for West Texas Intermediate (WTI) crude oil and Henry Hub natural gas of $55.00 per barrel and $2.50 per MMBtu, respectively. This is consistent with the forward pricing at the time of the budget process. The vast majority of cash generated by KMI 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, where KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. For 2020, the company estimates that every $1 per barrel change in the average WTI crude oil price impacts DCF by approximately $7 million, and each $0.10 per MMBtu change in the price of natural gas impacts DCF by approximately $1 million.
The KMI board of directors will review the 2020 budget for approval at its January board meeting, and management will discuss the budget in detail during the company’s annual investor conference on January 29, 2020 in Houston, Texas. Kinder Morgan remains committed to transparency and will continue to publish its budget on the company’s website as presented at the investor conference. The 2020 budget will be the standard by which KMI measures its performance next year and will be a factor in determining employee compensation.
About Kinder Morgan, Inc.
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.
Non-GAAP Financial Measures
The non-generally accepted accounting principles (non-GAAP) financial measures of distributable cash flow (DCF), both in the aggregate and per share; net income before interest expense, income taxes, depreciation, depletion, amortization, or DD&A, including amortization of excess cost of equity investments, and Certain Items (Adjusted EBITDA); and Net Debt are presented herein.
Our non-GAAP measures described further below should not be considered alternatives to GAAP net income or other GAAP measures and have important limitations as analytical tools. Our computations of these non-GAAP measures may differ from similarly titled measures used by others. You should not consider these non-GAAP measures in isolation or as substitutes for an analysis of our results as reported under GAAP. Management compensates for the limitations of these non-GAAP measures by reviewing our comparable GAAP measures, understanding the differences between the measures and taking this information into account in its analysis and its decision-making processes.
Certain Items, as adjustments used to calculate our non-GAAP measures, are items that are required by GAAP to be reflected in net income, but typically either (1) do not have a cash impact (for example, asset impairments), or (2) by their nature are separately identifiable from our normal business operations and in our view are likely to occur only sporadically (for example certain legal settlements, enactment of new tax legislation and casualty losses).
DCF is calculated by adjusting net income available to common stockholders for Certain Items, DD&A and amortization of excess cost of equity investments, income tax expense, cash taxes, sustaining capital expenditures and other items. DCF is a significant performance measure useful to management and external users of our financial statements in evaluating our performance and in measuring and estimating the ability of our assets to generate cash earnings after servicing our debt, paying cash taxes and expending sustaining capital, that could be used for discretionary purposes such as common stock dividends, stock repurchases, retirement of debt, or expansion capital expenditures. DCF should not be used as an alternative to net cash provided by operating activities computed under GAAP. We believe the GAAP measure most directly comparable to DCF is net income available to common stockholders. DCF per common share is DCF divided by average outstanding common shares, including restricted stock awards that participate in common dividends.
Adjusted EBITDA is calculated by adjusting net income before interest expense, income taxes, and DD&A, including amortization of excess cost of equity investments (EBITDA), for Certain Items, KMI’s share of unconsolidated joint venture (JV) DD&A and income tax expense (net of our partners’ share of consolidating JV DD&A and income tax expense), and net income attributable to noncontrolling interests. Based on the expected December 2019 closing of the KML-Pembina transaction, our 2020 calculations are not adjusted for KML noncontrolling interests. Adjusted EBITDA is used by management and external users, in conjunction with our Net Debt (as described further below), to evaluate certain leverage metrics. Therefore, we believe Adjusted EBITDA is useful to investors. We believe the GAAP measure most directly comparable to Adjusted EBITDA is net income.
Net Debt is calculated by subtracting from debt (i) cash and cash equivalents, (ii) the preferred interest in the general partner of Kinder Morgan Energy Partners L.P., (iii) debt fair value adjustments and (iv) the foreign exchange impact on Euro-denominated bonds for which we have entered into currency swaps. Based on the expected December 2019 closing of the KML-Pembina transaction, our expected Net Debt as calculated for the end of 2019 and thereafter is not adjusted for outstanding KML preferred equity. We believe Net Debt is useful to investors and other users of our financial information in evaluating our leverage. We believe the most comparable measure to Net Debt is debt net of cash and cash equivalents.
Important Information Relating to Forward-Looking Statements
This news release includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. Generally the words “expects,” “believes,” “anticipates,” “plans,” “will,” “shall,” “estimates,” and similar expressions identify forward-looking statements, which are generally not historical in nature. Forward-looking statements in this news release include, among others, express or implied statements pertaining to the Pembina transactions, including the expected timing and benefits thereof; KMI's expected Adjusted EBITDA, DCF and Net Debt-to-Adjusted EBITDA ratio for 2019 and for 2020; anticipated dividends; KMI’s balance sheet/borrowing flexibility and the potential uses and benefits thereof; and KMI's capital projects, including expected completion timing and benefits of those projects. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management, based on information currently available to them. Although KMI believes that these forward-looking statements are based on reasonable assumptions, it can give no assurance as to when or if any such forward-looking statements will materialize nor their ultimate impact on our operations or financial condition. Important factors that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements include the risks and uncertainties described in KMI’s reports filed with the Securities and Exchange Commission (SEC), including its Annual Report on Form 10-K for the year-ended December 31, 2018 (under the headings “Risk Factors” and “Information Regarding Forward-Looking Statements” and elsewhere) and its subsequent reports, which are available through the SEC’s EDGAR system at www.sec.gov and on our website at ir.kindermorgan.com. Forward-looking statements speak only as of the date they were made, and except to the extent required by law, KMI undertakes no obligation to update any forward-looking statement because of new information, future events or other factors. Because of these risks and uncertainties, readers should not place undue reliance on these forward-looking statements.