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Kinder Morgan announces 2020 financial expectations

Published by , Editorial Assistant
World Pipelines,

Kinder Morgan, Inc. has 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 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 US$5.1 billion of distributable cash flow (DCF), which is an approximately 3% 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 realised 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 US$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 US$1.2 billion for share repurchases or to invest in projects could increase the company’s DCF/share growth to 5% or 6%, 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 US$2.24 of DCF per share, up 3% compared to our current forecast for 2019, and US$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 US$1.25 per share (annualised), beginning with US$0.3125 per share for the first quarter 2020 dividend (which will be paid in the second quarter 2020). This will be a 25% increase from the 2019 dividend and a 150% increase from the 2017 dividend.
  • Invest US$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; unrealised 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 US$55/bbl and US$2.50/million Btu, 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 minimise this sensitivity. For 2020, the company estimates that every US$1/bbl change in the average WTI crude oil price impacts DCF by approximately US$7 million, and each US$0.10/million Btu change in the price of natural gas impacts DCF by approximately US$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 29 January 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.

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