Kinder Morgan Inc (KMI) SEC Quarterly Report (10-Q) for Q1 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

F O R M   10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission file number: 001-35081

(Exact name of registrant as specified in its charter)

1001 Louisiana Street, Suite 1000, Houston, Texas 77002

(Address of principal executive offices)(zip code)

Registrant's telephone number, including area code: 713-369-9000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☑ Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ☑

As of April 20, 2018 , the registrant had 2,206,071,454 Class P shares outstanding.

KINDER MORGAN, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Information Regarding Forward-Looking Statements

This report includes forward-looking statements. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as "anticipate," "believe," "intend," "plan," "projection," "forecast," "strategy," "position," "continue," "estimate," "expect," "may," or the negative of those terms or other variations of them or comparable terminology. In particular, expressed or implied statements concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow or to pay dividends are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict.

See "Information Regarding Forward-Looking Statements" and Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017 ( 2017 Form 10-K) for a more detailed description of factors that may affect the forward-looking statements. You should keep these risk factors in mind when considering forward-looking statements. These risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. Because of these risks and uncertainties, you should not place undue reliance on any forward-looking statement. We plan to provide updates to projections included in this report when we believe previously disclosed projections no longer have a reasonable basis.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

KINDER MORGAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Millions)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

KINDER MORGAN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  General

Organization

We are one of the largest energy infrastructure companies in North America. We own an interest in or operate approximately 85,000 miles of pipelines and 152 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, condensate, CO 2 and other products, and our terminals transload and store liquid commodities including petroleum products, ethanol and chemicals, and bulk products, including petroleum coke, metals and ores. We are also a leading producer of CO 2 , which we and others utilize for enhanced oil recovery projects primarily in the Permian basin.

Suspension of Non-Essential Spending on Trans Mountain Expansion Project

On April 8, 2018, KML announced that it was suspending all non-essential activities and related spending on the TMEP. KML also announced that under current circumstances, specifically including the continued actions in opposition to the TMEP by the Province of British Columbia (BC), it will not commit additional shareholder resources to the TMEP. However, KML further announced that it will consult with various stakeholders in an effort to reach agreements by May 31, 2018 that may allow the TMEP to proceed. KML stated it is difficult to conceive of any scenario in which it would proceed with the TMEP if an agreement is not reached by May 31, 2018. The focus in those consultations will be on two principles: clarity on the path forward, particularly with respect to the ability to construct through BC and adequate protection of KML shareholders.

KML had previously announced a "primarily permitting" strategy for the first half of 2018, focused on advancing the permitting process, rather than spending at full construction levels, until it obtained greater clarity on outstanding permits, approvals and judicial reviews. Rather than achieving greater clarity, the TMEP is now facing unquantifiable risk. Previously, opposition by BC was manifesting itself largely through BC's participation in an ongoing judicial review. Unfortunately, BC has now been asserting broad jurisdiction and reiterating its intention to use that jurisdiction to stop the TMEP. On April 18, 2018, the Attorney General for BC announced that the Province will file a reference case by April 30, 2018, presenting a constitutional question to the BC Court of Appeal. The reference question has yet to be publicly disclosed; it is anticipated the question will seek to define the extent of BC's constitutional jurisdiction, if any, to regulate marine or environmental risks, or the transport of certain petroleum products into BC. BC's intention in that regard has been neither validated nor quashed, and BC has continued to threaten unspecified additional actions to prevent the TMEP success. Those actions have created even greater, and growing, uncertainty with respect to the regulatory landscape facing the TMEP. In addition, the parties still await judicial decisions on challenges to the original Order in Council and the BC Environmental Assessment Certificate approving the TMEP. These items, combined with the impending approach of critical construction windows, the lead-time required to ramp up spending, and the imperative that KML avoid incurring significant debt while lacking the necessary clarity, brought KML to the decision it announced on April 8, 2018. Given the current uncertain conditions, KML is not updating its cost and schedule estimate at this time. However, construction delays are likely to entail increased costs due to a variety of factors including extended personnel, equipment and facilities charges, storage charges for unused material and equipment, extended debt service, and inflation, among others.

In the event the TMEP is terminated, resulting impairments, foregone capitalized equity costs and potential wind down costs would have a significant effect on our results of operations. Potential impairments would be recognized primarily in the period in which the decision to terminate is made. As of March 31, 2018, C$1,135 million has been spent on development of the TMEP.

Basis of Presentation

General

Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless stated otherwise. Our accompanying unaudited consolidated financial statements have been prepared under the rules and regulations of the United States Securities and Exchange Commission (SEC). These rules and regulations conform to the accounting principles contained in the FASB's Accounting Standards Codification, the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation.

In our opinion, all adjustments, which are of a normal and recurring nature, considered necessary for a fair statement of our financial position and operating results for the interim periods have been included in the accompanying consolidated financial statements, and certain amounts from prior periods have been reclassified to conform to the current presentation. Interim results are not necessarily indicative of results for a full year; accordingly, you should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 2017 Form 10-K.

The accompanying unaudited consolidated financial statements include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. We evaluate our financial interests in business enterprises to determine if they represent variable interest entities where we are the primary beneficiary.  If such criteria are met, we consolidate the financial statements of such businesses with those of our own.

Accounting Policy Changes

Adoption of New Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Updates (ASU) No. 2014-09, " Revenue from Contracts with Customers " and a series of related accounting standard updates designed to create improved revenue recognition and disclosure comparability in financial statements.  For more information, see Note 6.

On January 1, 2018, we retroactively adopted ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." This ASU requires the statements of cash flows to present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning of period and end of period amounts presented on the statements of cash flows. The retrospective application of this new accounting guidance resulted in a decrease of $13 million in "Other, net" in Cash Flows from Investing Activities, an increase of $103 million in "Cash, Cash Equivalents, and Restricted Deposits, beginning of the period," and an increase of $90 million in "Cash, Cash Equivalents, and Restricted Deposits, end of period" in our accompanying consolidated statement of cash flows for the three months ended March 31, 2017 from what was previously presented in our Quarterly Report on Form 10-Q for the three months ended March 31, 2017.

Amounts included in the restricted deposits in the accompanying consolidated financial statements represent a combination of restricted cash amounts required to be set aside by regulatory agencies to cover obligations for our captive and other insurance subsidiaries, and cash margin deposits posted by us with our counterparties associated with certain energy commodity contract positions.

On January 1, 2018, we adopted ASU No. 2017-05, " Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ."  This ASU clarifies the scope and application of ASC 610-20 on contracts for the sale or transfer of  nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. This ASU also clarifies that the derecognition of all businesses is in the scope of ASC 810 and defines an "in substance nonfinancial asset." We utilized the modified retrospective method to adopt the provisions of this ASU, which required us to apply the new standard to (i) all new contracts entered into after January 1, 2018, and (ii) to contracts that were not completed contracts as of January 1, 2018 through a cumulative adjustment to our "Retained deficit" balance. The cumulative effect of the adoption of this ASU was a $72 million , net of income taxes, adjustment to our "Retained deficit" balance as presented in our consolidated statement of stockholders' equity for the three months ended March 31, 2018.  This ASU also requires us to classify EIG's cumulative contribution to ELC as mezzanine equity, which we have included as "Redeemable noncontrolling interest" on our consolidated balance sheet as of March 31, 2018, as EIG has the right under certain conditions to redeem their interests for cash. The December 31, 2017 balance of $485 million is included in "Other long-term liabilities and deferred credits" on our consolidated balance sheet as of December 31, 2017.

On January 1, 2018, we adopted ASU No. 2017-07, " Compensation - Retirement Benefits (Topic 715) ." This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost, allows only the service cost component of net benefit cost to be eligible for capitalization and establishes how to present the service cost component and the other components of net benefit cost in the income statement. Topic 715 required us to retrospectively reclassify $3 million of other components of net benefit credits (excluding the service cost component) from "General and administrative" to "Other, net" in our accompany consolidated statement of income for the three months ended March 31, 2017. We prospectively applied Topic 715 related to net benefit costs eligible for capitalization.

On January 1, 2018, we adopted ASU No. 2018-02, " Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ."  This ASU permits companies to reclassify the income tax effects of the 2017 Tax Reform on items

within accumulated other comprehensive income to retained earnings.  The FASB refers to these amounts as "stranded tax effects."  Only the stranded tax effects resulting from the 2017 Tax Reform are eligible for reclassification.  The adoption of this ASU resulted in a $109 million reclassification adjustment of stranded income effects from "Accumulated other comprehensive loss" to "Retained deficit" on our consolidated statement of stockholders' equity for the three months ended March 31, 2018.

Earnings per Share

We calculate earnings per share using the two-class method. Earnings were allocated to Class P shares and participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards, which may be restricted stock or restricted stock units issued to employees and non-employee directors and include dividend equivalent payments, do not participate in excess distributions over earnings.

The following table sets forth the allocation of net income available to shareholders of Class P shares and participating securities (in millions):

________

2. Debt

We classify our debt based on the contractual maturity dates of the underlying debt instruments.  We defer costs associated with debt issuance over the applicable term. These costs are then amortized as interest expense in our accompanying consolidated statements of income.

The following table provides detail on the principal amount of our outstanding debt balances. The table amounts exclude all debt fair value adjustments, including debt discounts, premiums and issuance costs (in millions):

_______

We and substantially all of our wholly owned domestic subsidiaries are a party to a cross guarantee agreement whereby each party to the agreement unconditionally guarantees, jointly and severally, the payment of specified indebtedness of each other party to the agreement. Also, see Note 11.

Credit Facilities

KMI

As of March 31, 2018 , we had $275 million outstanding under our credit facility, $210 million outstanding under our commercial paper program and $99 million in letters of credit. Our availability under our $5 billion credit facility as of March 31, 2018 was $4,416 million . As of March 31, 2018 , we were in compliance with all required covenants.

KML

As of March 31, 2018 , KML had C $447 million available under its five year C $500 million working capital facility (after reducing the capacity for the C $53 million (U.S. $41 million ) in letters of credit), C $100.0 million (U.S. $78 million ) outstanding under its C $4.0 billion construction facility and no amounts outstanding under its C $1.0 billion revolving contingent credit facility. As of March 31, 2018 , KML was in compliance with all required covenants.

Current Portion of Debt

Our current portion of debt as of March 31, 2018 , primarily includes the above credit facilities and commercial paper borrowings and the following significant series of long-term notes maturing within the next 12 months:

3.  Stockholders' Equity

Common Equity

As of March 31, 2018 , our common equity consisted of our Class P common stock. For additional information regarding our Class P common stock, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

On July 19, 2017, our board of directors approved a $2 billion common share buy-back program that began in December 2017. During the three months ended March 31, 2018 , we repurchased approximately 13 million of our Class P shares for approximately $250 million .

KMI Common Stock Dividends

Holders of our common stock participate in any dividend declared by our board of directors, subject to the rights of the holders of any outstanding preferred stock. The following table provides information about our per share dividends:

On April 18, 2018, our board of directors declared a cash dividend of $0.20 per common share for the quarterly period ended March 31, 2018 , which is payable on May 15, 2018 to common shareholders of record as of the close of business on April 30, 2018.

Mandatory Convertible Preferred Stock

We have issued and outstanding 1,600,000 shares of 9.750% Series A mandatory convertible preferred stock, with a liquidating preference of $1,000 per share that, unless converted earlier at the option of the holders, will automatically convert into common stock on October 26, 2018. For additional information regarding our mandatory convertible preferred stock, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

Preferred Stock Dividends

On January 17, 2018, our board of directors declared a cash dividend of $24.375 per share of our mandatory convertible preferred stock (equivalent of $1.21875 per depositary share) for the period from and including January 26, 2018 through and including April 25, 2018, which is payable on April 26, 2018 to mandatory convertible preferred shareholders of record as of the close of business on April 11, 2018.

Noncontrolling Interests

KML Distributions

KML has a dividend policy pursuant to which it may pay a quarterly dividend on its restricted voting shares in an amount based on a portion of its DCF. For additional information regarding our KML distributions, see Note 11 to our consolidated financial statements included in our 2017 Form 10-K.

The following table provides information regarding KML distributions to our noncontrolling interests (in millions except per share and share distribution amounts):

On April 18, 2018, KML's board of directors declared a cash dividend of C$0.328125 per share of its Series 1 Preferred Shares for the period from and including February 15, 2018 through and including May 14, 2018, which is payable on May 15, 2018 to Series 1 Preferred Shareholders of record as of the close of business on April 30, 2018.

On April 18, 2018, KML's board of directors declared a cash dividend of C$0.325 per share of its Series 3 Preferred Shares for the period from and including February 15, 2018 through and including May 14, 2018, which is payable on May 15, 2018 to Series 3 Preferred Shareholders of record as of the close of business on April 30, 2018.

4.  Risk Management

Certain of our business activities expose us to risks associated with unfavorable changes in the market price of natural gas, NGL and crude oil.  We also have exposure to interest rate and foreign currency risk as a result of the issuance of our debt obligations.  Pursuant to our management's approved risk management policy, we use derivative contracts to hedge or reduce our exposure to some of these risks.

Energy Commodity Price Risk Management

As of March 31, 2018 , we had the following outstanding commodity forward contracts to hedge our forecasted energy commodity purchases and sales: 

As of March 31, 2018 , the maximum length of time over which we have hedged, for accounting purposes, our exposure to the variability in future cash flows associated with energy commodity price risk is through December 2022.

Interest Rate Risk Management

 As of March 31, 2018 and December 31, 2017 , we had a combined notional principal amount of $10,575 million and $9,575 million , respectively, of fixed-to-variable interest rate swap agreements, all of which were designated as fair value hedges. All of our swap agreements effectively convert the interest expense associated with certain series of senior notes from fixed rates to variable rates based on an interest rate of London Interbank Offered Rate plus a spread and have termination dates that correspond to the maturity dates of the related series of senior notes. As of March 31, 2018 , the maximum length of time over which we have hedged a portion of our exposure to the variability in the value of this debt due to interest rate risk is through March 15, 2035.

Foreign Currency Risk Management

As of both March 31, 2018 and December 31, 2017, we had a combined notional principal amount of $1,358 million of cross-currency swap agreements to manage the foreign currency risk related to our Euro denominated senior notes by effectively converting all of the fixed-rate Euro denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt at fixed rates equivalent to approximately 3.79% and 4.67% for the 7 -year and 12 -year senior notes, respectively. These cross-currency swaps are accounted for as cash flow hedges. The terms of the cross-currency swap agreements correspond to the related hedged senior notes, and such agreements have the same maturities as the hedged senior notes. 

Fair Value of Derivative Contracts

The following table summarizes the fair values of our derivative contracts included in our accompanying consolidated balance sheets (in millions):

Effect of Derivative Contracts on the Income Statement

The following tables summarize the impact of our derivative contracts in our accompanying consolidated statements of income (in millions): 

_____

_______

(a) The three months ended March 31, 2018 and 2017 include approximate gains of $8 million and $12 million , respectively, associated with natural gas, crude and NGL derivative contract settlements.

Credit Risks

In conjunction with certain derivative contracts, we are required to provide collateral to our counterparties, which may include posting letters of credit or placing cash in margin accounts.  As of March 31, 2018 and December 31, 2017 , we had no outstanding letters of credit supporting our commodity price risk management program. As of March 31, 2018 and December 31, 2017 , we had cash margins of $11 million and $1 million , respectively, posted by us with our counterparties as collateral and reported within "Restricted deposits" on our accompanying consolidated balance sheets. The balance at

March 31, 2018 consisted of initial margin requirements of $10 million and variation margin requirements of $1 million . We also use industry standard commercial agreements which allow for the netting of exposures associated with transactions executed under a single commercial agreement. Additionally, we generally utilize master netting agreements to offset credit exposure across multiple commercial agreements with a single counterparty.

We also have agreements with certain counterparties to our derivative contracts that contain provisions requiring the posting of additional collateral upon a decrease in our credit rating.  As of March 31, 2018 , based on our current mark to market positions and posted collateral, we estimate that if our credit rating were downgraded one notch we would be required to post $43 million of additional collateral and no additional collateral beyond this $43 million if we were downgraded two notches.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Loss

Cumulative revenues, expenses, gains and losses that under GAAP are included within our comprehensive income but excluded from our earnings are reported as "Accumulated other comprehensive loss" within "Stockholders' Equity" in our consolidated balance sheets. Changes in the components of our "Accumulated other comprehensive loss" not including non-controlling interests are summarized as follows (in millions):