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After a tough 2015, Kinder Morgan (NYSE: KMI) got back on its feet last year recovering a significant portion of its previous slide. To continue that recovery in 2017, the company needs to remain on track with its improvement plan. Investors will get a snapshot of its progress this week when the energy infrastructure giant releases fourth-quarter results. While that report will contain a plethora of numbers, there are three key metrics that investors need to focus on this week: distributable cash flow, the leverage ratio, and the size of its backlog. Here's a closer look at why these numbers matter and what to expect in the report.
Was distributable cash flow as expected?
Heading into 2016, Kinder Morgan anticipated that it would produce slightly more than $5 billion of distributable cash flow (DCF) for the year, or $4.95 billion when accounting for preferred stock dividends. However, the company adjusted those expectations throughout the year to better reflect the changing reality. In January, it revised that bottom-line number to $4.7 billion, which reflected falling commodity prices, a coal customer bankruptcy, and other changes. It continued to adjust expectations throughout the year, and as of the end of last quarter, expected DCF to be about 4% below budget or roughly $4.5 billion.
The company had already generated $3.36 billion of DCF through last quarter, which implies that it needed to produce about $1.14 billion of DCF during the fourth quarter to meet the revised guidance. Given that outlook, what investors should focus on this week is anything that caused the company's actual result to be materially different from guidance. If results did trail expectations, check to see if it was a one-time issue or part of a longer-term problem.
Did the leverage ratio hit the mark?
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One of Kinder Morgan's top priorities this year has been to improve its balance sheet. Initially, the company had hoped to push its debt-to-EBITDA ratio below 5.5 times by year-end. However, after completing several strategic initiatives during the year, including a joint venture with Southern Company (NYSE: SO), Kinder Morgan sees that key metric ending the year below 5.3 times.
Hitting this mark is important because the company's aim is to get its debt-to-EBITDA ratio below 5.0 times, which is the target to restart dividend growth. Needless to say, if leverage ends the year above target, it could delay an eventual dividend increase. That is why investors should focus on any factors causing this important metric to miss the mark.
Image source: Kinder Morgan Inc.
What's still in the pipeline?
One of the reasons Kinder Morgan had to cut its dividend and focus on cutting debt was to help finance its large backlog of growth projects. In years past, it had no trouble issuing cheap equity and debt to fund these projects. However, the oil market downturn made those forms of capital much more expensive, which is why the company decided to support growth with internally generated cash flow.
As of the end of last quarter, Kinder Morgan had $13 billion of projects still in its backlog, which is down from $18.2 billion at the beginning of the year. Driving that decline was the company's decision to pull the plug on two major pipeline projects as well as signing joint venture agreements on other projects. The company has already said that it intends to seek more joint ventures similar to its Southern Company deal on these remaining projects, incuding finding a partner for the biggest project in its pipeline, the $5.4 billion Trans Mountain Pipeline expansion. Because of the continued high grading of the backlog, investors should focus on any significant changes to the size of the backlog as well as any notable progress on securing new strategic partners.
Kinder Morgan made steady progress throughout 2016, which put it on track toward long-term sustainability. The hope is that the company did not take any steps backward during the fourth quarter on the metrics that matter the most. Its ability to avoid that fate would set it up for continued improvement in 2017 as it looks to get back toward becoming the income growth stock it once was.
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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.