(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 and (ii) our management's discussion and analysis of financial condition and results of operations included in our 2018 Form 10-K.
Recent Developments
2019 Outlook
We are on track to meet our 2019 budget, which contemplates declaring a dividend of $0.65 (annualized) per Restricted Voting Share, generating Adjusted EBITDA of $213 million and generating DCF from continuing operations of approximately $109 million, representing DCF per Restricted Voting Share of $0.90. We also plan to invest approximately $35 million in expansion projects (versus $32 million contemplated in the budget), and, consistent with the budget, to end the year with a Net Debt-to-Adjusted EBITDA ratio of approximately 1.3 times (treating 50% of our preferred equity as debt).
We do not provide forecasted income from continuing operations (the GAAP financial measure most directly comparable to the non-GAAP financial measures DCF from continuing operations and Adjusted EBITDA) due to the impracticality of quantifying certain amounts required by GAAP, such as realized and unrealized foreign currency gains and losses and potential changes in estimates for certain contingent liabilities. See "Results of Operations-Non-GAAP Financial Measures" for more information on DCF and Adjusted EBITDA.
Trans Mountain Transaction
On August 31, 2018, we closed on the sale of the Trans Mountain Asset Group, which was indirectly acquired by the Government of Canada through Trans Mountain Corporation (a subsidiary of the Canada Development Investment Corporation) for cash consideration of approximately $4.43 billion, which is the contractual purchase price of $4.5 billion net of a preliminary working capital adjustment (the "Trans Mountain Transaction"). Additionally, in February 2019, we paid the remaining $37.0 million of working capital adjustments that were accrued as of December 31, 2018. The underlying assets in the Trans Mountain Asset Group were primarily within our Pipelines business segment and the operating results for the Trans Mountain Asset Group are presented as "Income (loss) from Discontinued Operations, Net of Tax" in the accompanying consolidated statements of income and the following "-Results of Operations" for the 2018 periods.
2019 Return of Capital and Share Consolidation
Pursuant to our voting shareholders' approval on November 29, 2018, distributions of approximately $1.2 billion were made as a return of capital to holders of our Restricted Voting Shares ($11.40 per Restricted Voting Share) and approximately $2.8 billion to KMI as the indirect holder of our Special Voting Shares on January 3, 2019 (the "Return of Capital"). To facilitate the Return of Capital and provide flexibility for dividends going forward, our voting shareholders also approved (i) a reduction of the stated capital of our Restricted Voting Shares by $1.45 billion (the "Stated Capital Reduction") and
Review of Strategic Alternatives
Following the Trans Mountain sale, we announced that we would undertake a strategic review of the company to determine a course of action that maximizes value to all our shareholders. The options evaluated included, among others, continuing to operate as a standalone enterprise, a disposition by sale, and a strategic combination with another company.
After a multi-month process that involved rigorous analysis of a variety of potential alternatives, our board of directors determined that the current best course of action for the Company and its shareholders is for KML to remain a stand-alone public entity. This determination was made taking into account and consistent with the recommendation of a special committee of independent KML directors not affiliated with Kinder Morgan. The special committee retained independent financial and legal advisors. Our strategic infrastructure operations across western Canada are underpinned by multi-year take-or-pay contracts with high quality customers and stable cash flows, and our energy transportation and storage assets are central to the energy infrastructure of Western Canada.
Terminals Matters
All material permits have been secured and construction activities have begun on the distillate storage expansion project at our Vancouver Wharves terminal in North Vancouver, British Columbia. The approximately $43 million capital project, which calls for the construction of two new distillate tanks with combined storage capacity of 200,000 barrels and enhancements to the railcar unloading capabilities, is supported by a 20-year initial term, take-or-pay contract with an affiliate of a large, international integrated energy company. The project is expected to be placed in service late first quarter of 2021.
As previously disclosed in our 2018 Form 10-K, a material contractual arrangement at the Edmonton Rail Terminal expires in April 2020 and includes a right of renewal on favorable terms for our customer related to rail terminal and associated pipeline connection service fees. We expect this will result in lower revenues of approximately $43 million and $11 million on an annual basis for rail terminal fees and associated pipeline connection fees, respectively. We expect this revenue reduction will be partially offset by expansion projects as well as favorable renewal rates on expiring contracts at our other terminal facilities.
Results of Operations
Overview
We evaluate the performance of our reportable business segments by evaluating Segment EBDA. We believe that Segment EBDA is a useful measure of our operating performance because it measures segment operating results before depreciation and amortization and certain expenses that are generally not controllable by our business segment operating managers, such as certain general and administrative expense, interest expense, net, and income tax expense. Our general and administrative expenses include such items as employee benefits, insurance, rentals, certain litigation, and shared corporate services including accounting, information technology, human resources, and legal services.
Consolidated Earnings Results
Earnings
Three Months Ended June 30, 2019 2018 increase/(decrease)
(In millions of Canadian dollars, except
percentages)
Segment EBDA(a)
Terminals 51.1 53.6 (2.5 ) (5 )%
Pipelines 11.3 10.2 1.1 11 %
Total Segment EBDA(b) 62.4 63.8 (1.4 ) (2 )%
D&A (22.0 ) (20.3 ) (1.7 ) (8 )%
General and administrative(c) (9.3 ) (10.6 ) 1.3 12 %
Interest (expense) income, net (0.6 ) 0.4 (1.0 ) 250 %
Income from continuing operations before
income taxes 30.5 33.3 (2.8 ) (8 )%
Income tax expense (8.9 ) (9.8 ) 0.9 9 %
Income from continuing operations 21.6 23.5 (1.9 ) (8 )%
Income (loss) from discontinued
operations, net of tax(d) - (9.8 ) 9.8 (100 )%
Net income 21.6 13.7 7.9 58 %
Preferred share dividends (7.2 ) (7.2 ) - - %
Net income attributable to Kinder Morgan
interest (10.0 ) (4.7 ) (5.3 ) (113 )%
Net income available to Restricted Voting
Shareholders 4.4 1.8 2.6 144 %
Earnings
Six Months Ended June 30, 2019 2018 increase/(decrease)
(In millions of Canadian dollars, except
percentages)
Segment EBDA(a)
Terminals 102.7 96.2 6.5 7 %
Pipelines 21.6 16.5 5.1 31 %
Total Segment EBDA(b) 124.3 112.7 11.6 10 %
D&A (43.8 ) (40.0 ) (3.8 ) (10 )%
General and administrative(c) (20.4 ) (19.5 ) (0.9 ) (5 )%
Interest income, net 0.6 - 0.6 n/a
Income from continuing operations before
income taxes 60.7 53.2 7.5 14 %
Income tax expense (17.8 ) (15.7 ) (2.1 ) (13 )%
Income from continuing operations 42.9 37.5 5.4 14 %
Income (loss) from discontinued operations,
net of tax(d) - 20.6 (20.6 ) (100 )%
Net income 42.9 58.1 (15.2 ) (26 )%
Preferred share dividends (14.4 ) (14.4 ) - - %
Net income attributable to Kinder Morgan
interest (19.9 ) (31.1 ) 11.2 36 %
Net income available to Restricted Voting
Shareholders 8.6 12.6 (4.0 ) (32 )%
_________
n/a - not applicable
(b) Three and six month 2018 amounts include increases in earnings of $9.0 million, related to the certain items described in footnote (a) to the "-Segment Earnings Results-Terminals Segment" table below.
(c) General and administrative expenses for the three and six months ended June 30, 2019 includes increases to expense of $0.2 million and $0.9 million, respectively, and the three and six months ended June 30, 2018 includes increases to expense of $3.0 million for certain items described in footnote
(d) See Note 2 "Trans Mountain Transaction" to the accompanying consolidated financial statements.
Three Months Ended June 30, 2019 vs Three Months Ended June 30, 2018
The certain items described in footnote (b) and (c) to the table above accounted for a $6.2 million decrease in income from continuing operations before income taxes for the second quarter of 2019 as compared to the same prior year period. After giving effect to these certain items, the $3.4 million increase in income from continuing operations before income taxes between the comparable quarters is primarily attributable to increased earnings from both of our segments partially offset by increased D&A and general and administrative expense.
Six Months Ended June 30, 2019 vs Six Months Ended June 30, 2018
The certain items described in footnote (b) and (c) to the table above accounted for a $6.9 million decrease in income from continuing operations before income taxes for the first six months of 2019 as compared to the same prior year period. After giving effect to these certain items, the $14.4 million increase in income from continuing operations before income taxes between the comparable periods is primarily attributable to increased earnings from both of our segments, higher interest income due to deposits of the proceeds from the Trans Mountain Transaction in interest bearing cash equivalent accounts partially offset by increased D&A and general and administrative expense.
Non-GAAP Financial Measures
For reporting periods included in the following DCF and Adjusted EBITDA tables, our discontinued operations (which are comprised of our Trans Mountain Asset Group) are presented as a separate reconciling item labeled as "DCF from discontinued operations" and "Adjusted EBITDA from discontinued operations," respectively. DCF from discontinued operations and Adjusted EBITDA from discontinued operations are also reconciled to their comparable GAAP measure, income (loss) from discontinued operations, net of tax in footnote (d) to the accompanying tables.
In addition to using financial measures prescribed by GAAP, references are made in this report to DCF, both in the aggregate and per share, Adjusted EBITDA, Segment EBDA before certain items and Net Debt, which are measures that do not have any standardized meaning as prescribed by GAAP. These non-GAAP measures should not be considered an alternative to GAAP net income or any other GAAP measures, and such non-GAAP measures have important limitations as analytical tools. The computation of DCF, Adjusted EBITDA, Segment EBDA before certain items and Net Debt may differ from similarly titled measures used by others. Accordingly, use of such terms may not be comparable to similarly defined measures presented by other entities. Investors should not consider these non-GAAP measures in isolation or as a substitute for an analysis of results as reported under GAAP. The limitations of these non-GAAP performance measures are compensated for by reviewing the comparable GAAP measures, understanding the differences between the measures, and taking this information into account in our analysis and our decision making processes. Any use of non-GAAP measures in this management's discussion and analysis is expressly qualified by this cautionary statement.
DCF is income from continuing operations, and income from discontinued operations, before D&A adjusted for: (i) income tax expense and cash income taxes (paid) refunded; (ii) sustaining capital expenditures (also referred to as ''maintenance'' capital expenditures); and (iii) "certain items", which we define as items required by GAAP to be reflected in net income, but typically either (a) do not have a cash impact, or (b) by their nature are separately identifiable from the normal business operations and in our view are likely to occur only sporadically (for example gains or losses on asset sales, legal settlements and casualty losses).
DCF is an important performance measure used by us and by external users of our financial statements in evaluating our performance and in measuring and estimating our ability to generate cash earnings after servicing our debt and preferred share dividends, paying cash taxes and expending sustaining capital, that could be used for discretionary purposes such as distributions or expansion capital expenditures (also referred to as ''discretionary'' capital expenditures). We use this performance measure and believe it provides users of our financial statements a useful performance measure reflective of our ability to generate cash earnings to supplement the comparable GAAP measure. 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 Income from continuing operations. A reconciliation of Income from continuing operations to DCF is provided in the table below. DCF per Restricted Voting Share is DCF divided by average outstanding Restricted Voting Shares, including restricted share unit awards that participate in dividends.
Reconciliation of Income from Continuing Operations to DCF
Three Months Ended June
30, Six Months Ended June 30,
2019 2018 2019 2018
(In millions of Canadian dollars, except per
share amounts)
Income from continuing operations 21.6 23.5 42.9 37.5
Reconciling items - add/(subtract):
Certain items before book tax(a) 0.2 (6.0 ) 0.9 (6.0 )
Book tax certain items(b) - 1.6 (0.2 ) 1.6
D&A 22.0 20.3 43.8 40.0
Total book taxes before certain items 8.9 8.2 18.0 14.1
Cash taxes (10.5 ) (1.5 ) (31.3 ) (8.3 )
Preferred share dividends (7.2 ) (7.2 ) (14.4 ) (14.4 )
Sustaining capital expenditures (6.7 ) (2.8 ) (9.0 ) (4.9 )
DCF from continuing operations 28.3 36.1 50.7 59.6
DCF from discontinued operations(d) - 55.7 - 109.2
DCF 28.3 91.8 50.7 168.8
DCF from continuing operations to KMI interest 19.8 25.3 35.5 41.8
DCF from continuing operations to Restricted
Voting Shareholders 8.5 10.8 15.2 17.8
Weighted average split-adjusted Restricted
Voting Shares outstanding for
dividends (in millions)(c) 35.1 34.9 35.1 34.8
DCF from continuing operations per
split-adjusted Restricted Voting
Share 0.24 0.31 0.43 0.51
Adjusted EBITDA is used by us and by external users of our financial statements, in conjunction with outstanding debt, net of cash, to evaluate certain leverage metrics. We do not allocate Adjusted EBITDA amongst equity interest holders as we view total Adjusted EBITDA as a measure against our overall leverage.
Reconciliation of Income from Continuing Operations to Adjusted EBITDA
Three Months Ended June
30, Six Months Ended June 30,
2019 2018 2019 2018
(In millions of Canadian dollars)
Income from continuing operations 21.6 23.5 42.9 37.5
Reconciling items - add/(subtract):
Total certain items(a)(b) 0.2 (4.4 ) 0.7 (4.4 )
D&A 22.0 20.3 43.8 40.0
Total book taxes before certain items 8.9 8.2 18.0 14.1
Interest expense (income) , net 0.6 (0.4 ) (0.6 ) -
Adjusted EBITDA from continuing operations 53.3 47.2 104.8 87.2
Adjusted EBITDA from discontinued operations(d) - 60.6 - 118.6
Adjusted EBITDA 53.3 107.8 104.8 205.8
_________
table included above.
(c) Includes stock awards of Restricted Voting Shares that participate in dividends.
(d) DCF from discontinued operations and Adjusted EBITDA from discontinued operations reconciliations are as follows:
DCF from discontinued operations:
Three Months Six Months
Ended June 30, 2018
(In millions of Canadian dollars)
Income (loss) from discontinued operations, net of tax (9.8 ) 20.6
Reconciling items - add/(subtract):
Certain items before book tax (1) 60.5 60.5
Book tax certain items (1) (16.1 ) (16.1 )
D&A 17.9 35.0
Total book taxes before certain items 11.3 21.9
Sustaining capital expenditures (8.1 ) (12.7 )
DCF from discontinued operations 55.7 109.2
Adjusted EBITDA from discontinued operations:
Three Months Six Months
Ended June 30, 2018
(In millions of Canadian dollars)
Income (loss) from discontinued operations, net of tax (9.8 ) 20.6
Reconciling items - add/(subtract):
Total certain items (1) 44.4 44.4
D&A 17.9 35.0
Total book taxes before certain items 11.3 21.9
Interest income, net (3.2 ) (3.3 )
Adjusted EBITDA from discontinued operations 60.6 118.6
_________
Net Debt
Net Debt as used in this report is a non-GAAP financial measure that management believes is useful to investors and other users of our financial information in evaluating our leverage, individually and in conjunction with Adjusted EBITDA. Net Debt is calculated by adding 50% of the principal amount of our preferred equity to and subtracting cash and cash equivalents from debt. We believe the most comparable measure to Net Debt is debt net of cash and cash equivalents.
Segment EBDA Before Certain Items
Segment EBDA before certain items (a non-GAAP measure) is used by management in its analysis of segment performance and management of our business. General and administrative expenses are generally not under the control of our segment operating managers, and therefore, are not included when we measure business segment operating performance. We believe Segment EBDA before certain items is a significant performance metric because it provides us and external users of our financial statements additional insight into the ability of our segments to generate segment cash earnings on an ongoing basis. We believe it is useful to investors because it is a performance 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 Segment EBDA before certain items is Segment EBDA.
In the tables for each of our business segments under "-Segment Earnings Results" below, Segment EBDA before certain Items is calculated by adjusting the Segment EBDA for the applicable certain item amounts, which are totaled in the tables and described in the footnotes to those tables (if any).
Segment EBDA and Segment EBDA before certain items exclude discontinued operations for the 2018 periods.
Segment Earnings Results
Terminals Segment
Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
(In millions of Canadian
dollars, except operating statistics)
Revenues 87.7 80.5 173.7 154.7
Operating expenses, except D&A (36.4 ) (35.5 ) (70.8 ) (67.1 )
Other (expense) income, net (0.2 ) 8.5 (0.2 ) 8.4
Other, net and unrealized foreign exchange gain - 0.1 - 0.2
Segment EBDA 51.1 53.6 102.7 96.2
Certain items(a) - (9.0 ) - (9.0 )
Segment EBDA before certain items 51.1 44.6 102.7 87.2
Change from prior period Increase/(Decrease)
Revenues 7.2 9 % 19.0 12 %
Segment EBDA before certain items 6.5 15 % 15.5 18 %
Operating statistics 2019 2018 2019 2018
Bulk transload tonnage (MMtons) 0.9 1.0 1.9 1.8
Liquids tankage capacity available for service
(MMBbl)(b) 9.6 8.4 9.6 8.4
Liquids utilization %(c) 92 % 100 % 92 % 100 %
________
(a) Represents the gain on the sale of certain assets.
(b) Includes our share of joint venture capacity.
(c) The ratio of our tankage capacity in service to tankage capacity available for service.
Below are the changes in both Segment EBDA before certain items and revenues:
Segment EBDA before certain items Revenues
increase/(decrease) increase/(decrease)
(In millions of Canadian
dollars, except percentages)
Base Line joint venture 5.4 106 % 5.9 104 %
North 40 Terminal 1.4 14 % 1.0 8 %
Vancouver Wharves Terminal - - % 0.8 4 %
Edmonton South Terminal 0.5 6 % 0.2 1 %
. . .
Jul 25, 2019
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