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Kinder Morgan (NYSE: KMI) recently wrapped up a very successful 2016. That success kept the company on track to fulfill its strategy, which founder Richard Kinder reiterated on the company's recent fourth-quarter conference call. Here's what he had to say about the company's progress and what investors can expect from the pipeline giant in the future.
The strategy review session
Kinder led off the call, saying:
Let me just start the call by reiterating our strategy at Kinder Morgan. We're all about creating value for our shareholders. To accomplish that goal, we've worked really diligently in 2016 to strengthen our balance sheet, and we did. We also achieved financial performance consistent with the guidance we've been giving since our first quarter call in April 2016. We expect that the strengthening of the balance sheet will continue in 2017. We also expect that when we finish our work on JVs and as we work through the backlog, we will be producing cash well in excess of our investment needs. While we have alternatives in using that cash to deliver value to shareholders, our current thinking remains that the best way to deliver that value is through substantially increasing our dividend. We expect to update you on that in the later part of this year when we announce our dividend policy for 2018.
As Kinder notes, the company's strategy is to create value for shareholders. The company believes that the best way to accomplish this is by returning more cash to shareholders via dividends. However, because of its high leverage ratio and investment capital needs, Kinder Morgan is not yet in the position to return as much money to investors as it would like.
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To address that situation, the company plans to take two parallel paths by simultaneously completing additional joint ventures and finishing construction on growth projects in its backlog. These two paths should get the company where it wants to be by 2018.
Partnering its way out of future liabilities
One of the keys to Kinder Morgan's ability to strengthen its balance sheet last year was the completion of a strategic joint venture transaction with Southern Company (NYSE: SO). The utility paid Kinder Morgan $1.47 billion for a 50% stake in the Southern Natural Gas pipeline system, while also assuming 50% of that system's debt. That transaction allowed Kinder Morgan to reduce its net debt by more than $3 billion last year. Further, it reduced the company's projected liabilities because Southern Company would fund half of the system's future expansion capital.
Kinder Morgan is seeking to complete additional joint venture transactions this year, primarily focused on reducing expansion capital requirements. At the top of its list is a plan to joint venture or IPO its Trans Mountain expansion project in Canada. Kinder Morgan recently won the right to proceed with that $5.4 billion project, which represents nearly half of its $12 billion project backlog.
Because the project is such a significant portion of Kinder Morgan's backlog, the company wants to offload some of the costs and risks associated with the project. That would free up some of the cash flow Kinder Morgan would have needed to invest in the project, enabling the company to use that cash for other things.
Image source: Kinder Morgan.
Growing into its balance sheet
Kinder Morgan's other focus this year will be to complete the growth projects it currently has under construction on time and on budget. The largest is the company's $2 billion LNG export facility near Savanah, Georgia. Like Trans Mountain, Kinder Morgan is looking for a joint venture partner to help share the costs of this project. However, the company remains committed to completing this project, even without assistance.
In addition to that project, the company has several natural gas pipelines expected to go into service over the next two years, as well asa major NGL pipeline joint ventureand $1.4 billion of projects in its terminals segment.
Once finished, these projects should supply the company with nearly $400 million of annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2018, assuming it does not partner any more of them before that time. That represents about 5% growth in adjusted EBITDA over 2017's projection, which would help push the company's debt-to-adjusted EBITDA ratio closer to its five times target. In essence, the company would grow into its balance sheet given that it doesn't intend to issue any more debt to financethese projects.
Adding it all up
Kinder Morgan's value-creation strategy hinges on its ability to pay a growing dividend. Given where its leverage and capital needs are at the moment, the company cannot afford to do that just yet. However, it believes it will reach that point over the next year by securing additional joint venture partners and completing construction of projects in its backlog, which will reduce future liabilities while growing cash flow. That would set the company up to deliver a substantial dividend boost sometime over the next year.
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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.