Kinder Morgan Inc.'s Forward Progress Continues

By Matthew DiLallo Markets Fool.com

Kinder Morgan (NYSE: KMI) started 2017 off with a solid performance in the first quarter, after its results came in slightly ahead of expectations. That performance gave the company the confidence to reaffirm its full-year guidance.

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Meanwhile, the company announced progress on several strategic initiatives during the quarter, which puts it on pace to potentially boost the dividend by year's end.

Kinder Morgan Inc. results: The raw numbers

Data source: Kinder Morgan Inc. Chart byauthor. In millions of dollars.

What happened with Kinder Morgan this quarter?

The pipeline giant's results were down but still ahead of expectations:

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  • Natural-gas pipeline segment earnings were slightly more than $1 billion, down about 10% from last year's first quarter. Driving that decline was the sale of a 50% stake in the Southern Natural Gas system to Southern Company (NYSE: SO) and lower tariffs on the Colorado Interstate Gas system. Partially offsetting those declines were incremental revenue from the recently completed Elba Express pipeline and improved results from Natural Gas Pipeline Company of America thanks to the completion of an expansion project. Overall, natural-gas transport volumes were up 1% during the quarter across the company's systems.
  • Earnings in the carbon-dioxide segment slipped 1% to $222 million because of lower oil prices and reduced oil production after the company deferred projects at two of its fields.
  • Terminals segment earnings were up an impressive 9% during the quarter to $302 million, because of strong performance at its liquids terminals. Driving the increase was the contribution from several Jones Act tankers that entered service last year, as well as the recently commissioned Kinder Morgan Export Terminal along the Houston Ship Channel.
  • Product pipeline earnings were up 1% to $287 million thanks to improving volumes. The company noted that crude-oil volumes were up 1% as a result of the strong performance on the Kinder Morgan Crude and Condensate Pipeline, as a result of an increase in shale drilling.
  • Kinder Morgan Canada earnings dipped 7% to $43 million because of the timing of operating expense charges and a 17% decrease in oil volumes flowing to Washington state because of an increase in oil from competing sources.
  • Overall, segment earnings before depreciation and amortization, before certain items, slipped 5% year over year. However, distributable cash flow was basically flat with last year, at $1.2 billion.

Image source: Getty Images.

What management had to say

CEO Steve Kean commented on the results:

We are pleased with our operational performance, which is slightly ahead of guidance we provided in January for the quarter, and we remain on target for the year. We generated earnings per common share for the quarter of $0.18 and distributable cash flow of $0.54 per common share, resulting in $935 million of excess distributable cash flow above our dividend.

As Kean noted, the company didn't run into any problems during the first quarter, putting it on pace to meet its full-year guidance. Instead, the most noteworthy events during the quarter were its strategic moves. Founder Richard Kinder provided those details by noting that the company "made additional progress on our two largest growth projects: Trans Mountain expansion and Elba Island liquefaction." He continued:

These are signature energy infrastructure assets for North America, and we expect they will contribute greatly to Kinder Morgan's future growth. With respect to Trans Mountain, after receiving approval from the Canadian federal government and the province of British Columbia to proceed with the project, we completed our final cost estimate review process with the shippers. Despite the shippers' right to terminate their contracts during this process, 100% of the original committed capacity (707,500 barrels per day) remains under contract. Additionally, while making steady progress constructing our Elba Island liquefaction facility, we welcomed EIG Global Energy Partners as a 49% joint-venture participant in that project.

Looking forward

Kinder Morgan still does have some work left to do on Trans Mountain. The company's goal is to find a financing alternative for the project similar to Elba Island. The company continues to explore both a joint-venture option and an IPO of Trans Mountain and its other Canadian assets. The culmination of that process will enable the company to remain on track to hit its leverage target of around 5.0 times net debt-to-adjusted EBITDA. That will improve the company's financial flexibility so it can allocate capital to other options, including share buybacks, new growth projects, additional debt reduction, and a dividend increase.

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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.