KMI: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Kinder Morgan's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 20, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Kinder Morgan.

Kinder Morgan owns and operates a sprawling network of pipelines and associated terminals for transporting oil, gas, carbon-dioxide, and other products. About 40 percent of the natural gas consumed in the U.S. is carried by Kinder Morgan pipelines.  In 2014, the company completed a series of acquisitions that converted general and limited partnership interests in various Kinder Morgan and El Paso entities into full ownership.  As was the case for nearly every company in the industry, Kinder Morgan's results in 2020 were hurt by the significant drop in worldwide demand for energy products as COVID-19 led to reduced economic activity.  The resulting decline in the price of oil and gas also impaired (i.e., reduced the carrying value of) the tangible and intangible assets on the company's balance sheet. 

Shares of Kinder Morgan, Inc., now trade for about $14 each.  These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Kinder Morgan recorded profits of $122 million on revenue of $12 billion during the last year. In the quarter that ended on 30 September 2020, Kinder Morgan earned $0.18 per share (excluding certain items), which missed the $0.20 Wall Street consensus forecast. See https://tinyurl.com/y2hps7cd for Kinder Morgan's most recent quarterly report.

Revenue in the September 2020 quarter totaled $2.9 billion, 9% less than last year's $3.2 billion. The Natural Gas Pipelines business was responsible for 62% of overall revenue, and this unit's revenue fell by 6.5% compared to the year-earlier result. The Products Pipelines business contributed 15% of revenue, and this unit's revenue fell by 8.7%. The Terminals and CO2 unit supplied 23% of revenue, and the amount fell by 16.3%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

The expectations Kinder Morgan's management communicated for the December 2020 quarter last October are shown below.  Unfortunately, for my purposes here, the guidance is for Distributable Cash Flow (DCF) and Adjusted Earnings Before Interest expense, income Taxes, Depreciation, depletion, amortization (DD&A), and Amortization of excess cost of equity investments and certain items (EBITDA).  The company does not provide guidance for GAAP net income, claiming it is impractical to make the necessary predictions.

For 2020, KMI’s original budget contemplated DCF of approximately $5.1 billion ($2.24 per common share) and Adjusted EBITDA of approximately $7.6 billion. Because of the pandemic-related reduced energy demand and the sharp decline in commodity prices, the company expects DCF to be below plan by slightly more than 10% and Adjusted EBITDA to be below plan by slightly more than 8%. As a result, KMI expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times.

Market conditions also negatively impacted a number of planned expansion projects such that they are not needed at this time or no longer meet our internal return thresholds. We therefore expect the budgeted $2.4 billion of expansion projects and contributions to joint ventures for 2020 to be lower by approximately $680 million. With this reduction, DCF less expansion capital expenditures is improved by approximately $135 million compared to budget, helping to keep our balance sheet strong.

The guidance indicates that Kinder Morgan expects DCF for the year to be less than 90 percent of $5.1 billion, or $4.59 billion.  DCF realized during the first nine months of 2020 was $3.35 billion, so the fourth-quarter estimate is $1.24. billion or a little less.  Similarly, the Adjusted EBITDA guidance for the year is 92 percent of $7.6 billion, or $7.0 billion.  For the fourth quarter, the estimate is $7.0 billion less the $5.13 billion of the first nine months of 2020, or $1.87 billion.

A prediction for GAAP net income can be derived from the DCF or Adjusted EBITDA estimates, but the calculation in each case requires approximations to account for the many items excluded from DCF and Adjusted EBITDA.

Consider Adjusted EBITDA:  During the first nine months of 2020, GAAP net income was about $5.6 billion less than Adjusted EBITDA.  However, $1.6 billion of this amount was a one-time impairment charge.  The difference between GAAP net income and Adjusted EBITDA was $4.0 billion, or $1.33 billion per quarter, excluding the impairment.  

Subtracting $1.33 billion from the $1.87 billion Adjusted EBITDA estimate yields $0.54 billion, or $540 million, as the GAAP net income estimate for the December 2020 quarter.

Coming up with an Income Statement prediction that would generate $540 million ($0.24 per share) in earnings is an even trickier proposition, and one most certainly prone to error.  But the following takes into consideration the information mentioned above and trends seen in the company's historical results. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #kindermorgan  #kmi  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis