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Kinder Morgan Inc. Ends 2017 on a High Note

Matthew DiLallo, The Motley Fool

Natural gas pipeline giant Kinder Morgan (NYSE: KMI) reported fourth-quarter and full-year results after the market closed on Wednesday. The company pulled in $1.19 billion, or $0.53 per share, of distributable cash flow for the quarter, which pushed its full-year total to $4.482 billion, or $2.00 per share. While that was slightly less than 2016's results, it beat expectations by $0.01 per share and set the stage for even better results in 2018.

Kinder Morgan Inc. results: The raw numbers

A chart showing Kinder Morgan's earnings by segment in the fourth quarter of 2017 and 2016.

Data source: Kinder Morgan Inc. Chart by author. Note: In millions of dollars.

What happened with Kinder Morgan this quarter? 

Results came in a bit better than expected.

  • Earnings in the company's natural gas pipeline segment rose 4% versus the fourth quarter of last year to $1.027 billion, driven by a combination of project completions and an improvement in volumes, which rose 8% in the quarter versus the year-ago period. Meanwhile, full-year earnings slipped 4% thanks mainly to the sale of a 50% stake in the Southern Natural Gas pipeline, though they came in about $2 million ahead of expectations.
  • Carbon dioxide segment earnings dipped 4% versus the year-ago period to $228 million mainly because of lower realized oil prices. Full-year results, likewise, fell 4% versus 2016, though they were about $7 million higher than expected due to stronger oil prices in the fourth quarter.
  • Earnings in the terminals segment rose 4% to $317 million owing to the delivery of another Jones Act tanker and the impact from recently completed expansion projects. Full-year results were also higher by 4%, though they did come in about $4 million below guidance in part attributable to the impact of Hurricane Harvey in the third quarter.
  • Product pipeline earnings increased 2% to $314 million on higher volumes across several systems, driven in part by a 2% uptick in oil pipeline volumes in the quarter. For the full year, earnings were up 1% and about $6 million higher than anticipated.
  • Kinder Morgan Canada's (TSX: KML) contribution to earnings climbed 22% to $50 million caused by the timing of operating costs, a stronger Canadian dollar, and how it financed its Trans Mountain Expansion Project. That said, full-year results came in just 3% higher and were about $5 million below guidance.
A gas pipeline under construction.

Image source: Getty Images.

What management had to say 

"Kinder Morgan thrived in 2017," according to Executive Chairman Richard Kinder. He further noted:

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.

Kinder pointed out that the company exceeded expectations on several fronts last year, not only beating guidance on DCF by a penny but also ending the year with a leverage ratio of 5.1 times versus a forecast that it would be 5.4 times, due mainly to the IPO of Kinder Morgan Canada. In addition, the company announced a plan to return significantly more cash to investors in 2018, including a 60% dividend increase and as much as $500 million via share repurchases. In fact, that plan was accelerated in December, with 14 million shares bought back for $250 million that month.

Looking forward 

Kinder Morgan also reaffirmed that DCF should start growing again, as it expected to produce $4.57 billion, or $2.05 per share, this year. Furthermore, it still plans to finance $2.2 billion of expansion projects with cash flow and opportunistically buy back up to another $250 million in shares.

That said, what remains not quite certain at the moment is when Kinder Morgan Canada will start construction on its Trans Mountain Pipeline Expansion. It said that it made "incremental progress during 2017 on permitting, regulatory condition satisfaction and land access. However, the scope and pace of the permits and approvals received to date does not allow for significant additional construction to begin at this time." As a result, the company pushed back its current projection that the earliest completion date wouldn't be until December 2020, implying that it might start construction this September, putting it a full year behind schedule.

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Matthew DiLallo owns shares of Kinder Morgan and has the following options: long January 2018 $30 calls on Kinder Morgan and short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.