General and Basis of Presentation
The following discussion and analysis should be read in conjunction with our
accompanying interim consolidated financial statements and related notes
included elsewhere in this report, and in conjunction with (i) our consolidated
financial statements and related notes in our 2020 Form 10-K; (ii) our
management's discussion and analysis of financial condition and results of
operations included in our 2020 Form 10-K; (iii) "Information Regarding
Forward-Looking Statements" at the beginning of this report and in our 2020 Form
10-K; and (iv) "Risk Factors" in our 2020 Form 10-K.
Long-lived Asset Impairment
During the quarter ended June 30, 2021, we recognized a non-cash, long-lived
asset impairment of $1,600 million related to our South Texas gathering and
processing assets within our Natural Gas Pipeline business segment, which was
driven by lower expectations regarding the volumes and rates associated with the
re-contracting of contracts expiring through 2024.
Stagecoach Acquisition
On July 9, 2021, we completed the acquisition of subsidiaries of Stagecoach Gas
Services LLC (Stagecoach), a natural gas pipeline and storage joint venture
between Consolidated Edison, Inc. and Crestwood Equity Partners, LP, for
approximately $1.228 billion, including a preliminary purchase price adjustment
for working capital. The Stagecoach assets include 4 natural gas storage
facilities with a total FERC-certificated working capacity of 41 Bcf and a
network of FERC-regulated natural gas transportation pipelines with multiple
interconnects to major interstate natural gas pipelines in the northeast region
of the U.S., including TGP.
Kinetrex Energy Acquisition
On July 16, 2021, we announced an agreement to acquire Indianapolis-based
Kinetrex Energy (Kinetrex) from an affiliate of Parallel49 Equity for
$310 million. Kinetrex is a supplier of liquefied natural gas in the Midwest and
a producer and supplier of renewable natural gas (RNG) under long-term contracts
to transportation service providers. Kinetrex has a 50% interest in the largest
RNG facility in Indiana as well as signed commercial agreements to begin
construction on three additional landfill based RNG facilities. Once they all
become operational next year, total annual RNG production from the four sites is
estimated to be over 4 Bcf. The transaction requires regulatory approval under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and is expected to
close in the third quarter of 2021.
Sale of an Interest in NGPL Holdings LLC
On March 8, 2021, we and Brookfield Infrastructure Partners L.P. (Brookfield)
completed the sale of a combined 25% interest in our joint venture, NGPL
Holdings LLC (NGPL Holdings), to a fund controlled by ArcLight Capital Partners,
LLC (ArcLight). We received net proceeds of $413 million for our proportionate
share of the interests sold which included the transfer of $125 million of our
$500 million related party promissory note receivable from NGPL Holdings to
ArcLight with quarterly interest payments at 6.75%. We recognized a pre-tax gain
of $206 million for our proportionate share, which is included within "Other,
net" in our accompanying consolidated statement of operations for the six months
ended June 30, 2021. We and Brookfield now each hold a 37.5% interest in NGPL
Holdings.
February 2021 Winter Storm
Our year-to-date earnings reflect impacts of the February 2021 winter storm that
affected Texas, which are largely nonrecurring. See "-Segment Earnings Results"
below. Some of the transactions executed during the winter storm remain subject
to risks, including counterparty financial risk, potential disputed purchases
and sales and potential legislative or regulatory action in response to, or
litigation arising out of, the unprecedented circumstances of the winter storm,
which could adversely affect our future earnings, cash flows and financial
condition.
2021 Dividends and Discretionary Capital
We expect to declare dividends of $1.08 per share for 2021, a 3% increase from
the 2020 declared dividends of $1.05 per share. Excluding the recent
acquisitions, we expect to invest $0.8 billion in expansion projects and
contributions to joint ventures during 2021.
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The expectations for 2021 discussed above involve risks, uncertainties and
assumptions, and are not guarantees of performance. Many of the factors that
will determine these expectations are beyond our ability to control or predict,
and because of these uncertainties, it is advisable not to put undue reliance on
any forward-looking statement.
Results of Operations
Overview
As described in further detail below, our management evaluates our performance
primarily using the GAAP financial measures of Segment EBDA (as presented in
Note 7, "Reportable Segments") and Net (loss) income attributable to Kinder
Morgan, Inc., along with the non-GAAP financial measures of Adjusted Earnings
and DCF, both in the aggregate and per share for each, Adjusted Segment EBDA,
Adjusted EBITDA and Net Debt.
GAAP Financial Measures
The Consolidated Earnings Results for the three and six months ended June 30,
2021 and 2020 present Segment EBDA and Net (loss) income attributable to Kinder
Morgan, Inc. which are prepared and presented in accordance with GAAP. Segment
EBDA is a useful measure of our operating performance because it measures the
operating results of our segments before DD&A and certain expenses that are
generally not controllable by our business segment operating managers, such as
general and administrative expenses and corporate charges, interest expense,
net, and income taxes. Our general and administrative expenses and corporate
charges include such items as unallocated employee benefits, insurance, rentals,
unallocated litigation and environmental expenses, and shared corporate services
including accounting, information technology, human resources and legal
services.
Non-GAAP Financial Measures
Our non-GAAP financial measures described below should not be considered
alternatives to GAAP Net (loss) income attributable to Kinder Morgan, Inc. or
other GAAP measures and have important limitations as analytical tools. Our
computations of these non-GAAP financial measures may differ from similarly
titled measures used by others. You should not consider these non-GAAP financial
measures in isolation or as substitutes for an analysis of our results as
reported under GAAP. Management compensates for the limitations of these
non-GAAP financial measures by reviewing our comparable GAAP measures,
understanding the differences between the measures and taking this information
into account in its analysis and its decision making processes.
Certain Items
Certain Items, as adjustments used to calculate our non-GAAP financial measures,
are items that are required by GAAP to be reflected in Net (loss) income
attributable to Kinder Morgan, Inc., but typically either (i) do not have a cash
impact (for example, asset impairments), or (ii) by their nature are separately
identifiable from our normal business operations and in our view are likely to
occur only sporadically (for example, certain legal settlements, enactment of
new tax legislation and casualty losses). We also include adjustments related to
joint ventures (see "Amounts from Joint Ventures" below and the tables included
in "-Consolidated Earnings Results (GAAP)-Certain Items Affecting Consolidated
Earnings Results," "-Non-GAAP Financial Measures-Reconciliation of Net (Loss)
Income Attributable to Kinder Morgan, Inc. (GAAP) to Adjusted EBITDA" and
"-Non-GAAP Financial Measures-Supplemental Information" below). In addition,
Certain Items are described in more detail in the footnotes to tables included
in "-Segment Earnings Results" and "-DD&A, General and Administrative and
Corporate Charges, Interest, net, and Noncontrolling Interests" below.
Adjusted Earnings
Adjusted Earnings is calculated by adjusting Net (loss) income attributable to
Kinder Morgan, Inc. for Certain Items. Adjusted Earnings is used by us and
certain external users of our financial statements to assess the earnings of our
business excluding Certain Items as another reflection of our ability to
generate earnings. We believe the GAAP measure most directly comparable to
Adjusted Earnings is Net (loss) income attributable to Kinder Morgan, Inc.
Adjusted Earnings per share uses Adjusted Earnings and applies the same
two-class method used in arriving at basic (loss) earnings per share. See
"-Non-GAAP Financial Measures-Reconciliation of Net (Loss) Income Attributable
to Kinder Morgan, Inc. (GAAP) to Adjusted Earnings to DCF" below.
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DCF
DCF is calculated by adjusting Net (loss) income attributable to Kinder Morgan,
Inc. for Certain Items (Adjusted Earnings), and further by DD&A and amortization
of excess cost of equity investments, income tax expense, cash taxes, sustaining
capital expenditures and other items. We also include amounts from joint
ventures for income taxes, DD&A and sustaining capital expenditures (see
"Amounts from Joint Ventures" below). DCF is a significant performance measure
useful to management and external users of our financial statements in
evaluating our performance and in measuring and estimating the ability of our
assets to generate cash earnings after servicing our debt, paying cash taxes and
expending sustaining capital, that could be used for discretionary purposes such
as dividends, stock repurchases, retirement of debt, or expansion capital
expenditures. DCF should not be used as an alternative to net cash provided by
operating activities computed under GAAP. We believe the GAAP measure most
directly comparable to DCF is Net (loss) income attributable to Kinder Morgan,
Inc. DCF per share is DCF divided by average outstanding shares, including
restricted stock awards that participate in dividends. See "-Non-GAAP Financial
Measures-Reconciliation of Net (Loss) Income Attributable to Kinder Morgan, Inc.
(GAAP) to Adjusted Earnings to DCF" and "-Adjusted Segment EBDA to Adjusted
EBITDA to DCF" below.
Adjusted Segment EBDA
Adjusted Segment EBDA is calculated by adjusting Segment EBDA for Certain Items
attributable to the segment. Adjusted Segment EBDA is used by management in its
analysis of segment performance and management of our business. We believe
Adjusted Segment EBDA is a useful performance metric because it provides
management and external users of our financial statements additional insight
into the ability of our segments to generate cash earnings on an ongoing basis.
We believe it is useful to investors because it is a measure that management
uses to allocate resources to our segments and assess each segment's
performance. We believe the GAAP measure most directly comparable to Adjusted
Segment EBDA is Segment EBDA. See "-Consolidated Earnings Results (GAAP)-Certain
Items Affecting Consolidated Earnings Results" for a reconciliation of Segment
EBDA to Adjusted Segment EBDA by business segment.
Adjusted EBITDA
Adjusted EBITDA is calculated by adjusting EBITDA for Certain Items. We also
include amounts from joint ventures for income taxes and DD&A (see "Amounts from
Joint Ventures" below). Adjusted EBITDA is used by management and external
users, in conjunction with our Net Debt (as described further below), to
evaluate certain leverage metrics. Therefore, we believe Adjusted EBITDA is
useful to investors. We believe the GAAP measure most directly comparable to
Adjusted EBITDA is Net (loss) income attributable to Kinder Morgan, Inc. In
prior periods Net (loss) income was considered the comparable GAAP measure and
has been updated to Net (loss) income attributable to Kinder Morgan, Inc. for
consistency with our other non-GAAP performance measures. See "-Adjusted Segment
EBDA to Adjusted EBITDA to DCF" and "-Non-GAAP Financial Measures-Reconciliation
of Net (Loss) Income Attributable to Kinder Morgan, Inc. (GAAP) to Adjusted
EBITDA" below.
Amounts from Joint Ventures
Certain Items, DCF and Adjusted EBITDA reflect amounts from unconsolidated joint
ventures and consolidated joint ventures utilizing the same recognition and
measurement methods used to record "Earnings from equity investments" and
"Noncontrolling interests," respectively. The calculations of DCF and Adjusted
EBITDA related to our unconsolidated and consolidated joint ventures include the
same items (DD&A and income tax expense, and for DCF only, also cash taxes and
sustaining capital expenditures) with respect to the joint ventures as those
included in the calculations of DCF and Adjusted EBITDA for our wholly-owned
consolidated subsidiaries. (See "-Non-GAAP Financial Measures-Supplemental
Information" below.) Although these amounts related to our unconsolidated joint
ventures are included in the calculations of DCF and Adjusted EBITDA, such
inclusion should not be understood to imply that we have control over the
operations and resulting revenues, expenses or cash flows of such unconsolidated
joint ventures.
Net Debt
Net Debt is calculated, based on amounts as of June 30, 2021, by subtracting the
following amounts from our debt balance of $33,260 million: (i) cash and cash
equivalents of $1,365 million (which, as of June 30, 2021, the cash and cash
equivalents component of Net Debt includes "Restricted deposits" of
approximately $506 million held in escrow that were used on July 1, 2021 for the
repayment of senior notes plus associated accrued interest); (ii) debt fair
value adjustments of $1,069 million; and (iii) the foreign exchange impact on
Euro-denominated bonds of $125 million for which we have entered into currency
swaps. Net Debt is a non-GAAP financial measure that is useful to investors and
other users of our financial information in evaluating our leverage. We believe
the most comparable measure to Net Debt is debt net of cash and cash
equivalents.
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