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April 23, 2019, 6:06 a.m. EDT

10-Q: KINDER MORGAN, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 and (ii) our management's discussion and analysis of financial condition and results of operations included in our 2018 Form 10-K.

Sale of Trans Mountain Pipeline System and Its Expansion Project

On August 31, 2018, KML completed the sale of the TMPL, the TMEP, Puget Sound pipeline system and Kinder Morgan Canada Inc., the Canadian employer of our staff that operate the business, which were indirectly acquired by the Government of Canada through Trans Mountain Corporation (a subsidiary of the Canada Development Investment Corporation) for net cash consideration of C$4.4 billion (U.S.$3.4 billion), net of working capital adjustments (TMPL Sale). During the three months ended March 31, 2019, KML settled the remaining C$37.0 million (U.S.$28 million) of working capital adjustments, which amount is included in the accompanying consolidated statement of cash flows within "Sales of assets and equity investments, net of working capital settlements" for the three months ended March 31, 2019 and for which we had substantially accrued for as of December 31, 2018.

On January 3, 2019, KML distributed the net proceeds from the TMPL Sale to its shareholders as a return of capital. Public owners of KML's restricted voting shares, reflected as noncontrolling interests by us, received approximately $0.9 billion (C$1.2 billion), and most of our approximate 70% portion of the net proceeds of $1.9 billion (C$2.5 billion) (after Canadian tax) were used to repay our outstanding commercial paper borrowings of $0.4 billion, and in February 2019, to pay down approximately $1.3 billion of maturing long-term debt.

Results of Operations

Overview

Our management evaluates our performance primarily using the measures of Segment EBDA and, as discussed below under "-Non-GAAP Financial Measures," DCF and Segment EBDA before certain items. 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, interest expense, net, and income taxes. Our general and administrative expenses 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.

In our discussions of the operating results of individual businesses that follow, we generally identify the important fluctuations between periods that are attributable to dispositions and acquisitions separately from those that are attributable to businesses owned in both periods.

For segment reporting purposes, effective January 1, 2019, certain assets were transferred among our business segments. As a result, individual segment results for the three months ended March 31, 2018 have been reclassified to conform to the current presentation in the following Management Discussion and Analysis tables, which includes increased (decreased) Segment EBDA for the following business segments: Natural Gas Pipelines $(8) million; Products Pipelines $7 million; and Terminals $1 million.







        Consolidated Earnings Results
                                                               Three Months Ended March 31,
                                                                                                          Earnings
                                                                  2019               2018            increase/(decrease)
                                                                           (In millions, except percentages)
        Segment EBDA(a)
        Natural Gas Pipelines                               $       1,203       $       1,128     $     75             7  %
        Products Pipelines                                            276                 266           10             4  %
        Terminals                                                     299                 296            3             1  %
        CO2                                                           198                 199           (1 )          (1 )%
        Kinder Morgan Canada(b)                                        (2 )                46          (48 )        (104 )%
        Total Segment EBDA(c)                                       1,974               1,935           39             2  %
        DD&A                                                         (593 )              (570 )        (23 )          (4 )%
        Amortization of excess cost of equity investments             (21 )               (32 )         11            34  %
        General and administrative and corporate charges(d)          (161 )              (160 )         (1 )          (1 )%
        Interest, net(e)                                             (460 )              (467 )          7             1  %
        Income before income taxes                                    739                 706           33             5  %
        Income tax expense(f)                                        (172 )              (164 )         (8 )          (5 )%
        Net income                                                    567                 542           25             5  %
        Net income attributable to noncontrolling interests           (11 )               (18 )          7            39  %
        Net income attributable to Kinder Morgan, Inc.                556                 524           32             6  %
         Preferred stock dividends                                      -                 (39 )         39           100  %
        Net Income Available to Common Stockholders         $         556       $         485     $     71            15  %
        _______
        


(b) As a result of the TMPL Sale on August 31, 2018, this segment does not have results of operations on a prospective basis.

Certain items affecting Total Segment EBDA (see "-Non-GAAP Measures" below)

(d) 2019 and 2018 amounts include a net increase in expense of $3 million and a net decrease in expense of $4 million, respectively, related to the combined effect of the certain items related to general and administrative expense and corporate charges disclosed below in "-General and Administrative and Corporate Charges, Interest, net and Noncontrolling Interests."

(e) 2019 and 2018 amounts include a net increase in expense of $2 million and a net decrease in expense of $5 million, respectively, related to the combined effect of the certain items related to interest expense, net disclosed below in "-General and Administrative and Corporate Charges, Interest, net and Noncontrolling Interests."

(f) 2019 and 2018 amounts include a net increase in expense of $2 million and a net decrease in expense of $3 million, respectively, related to the combined net effect of the certain items related to income tax expense representing the income tax provision on certain items plus discrete income tax items.

The certain item totals reflected in footnotes (c) through (e) to the table above accounted for a $6 million decrease in income before income taxes for the first quarter of 2019, as compared to the same prior year period (representing the difference between decreases of $13 million and $7 million in income before income taxes for the first quarter of 2019 and 2018, respectively). After giving effect to these certain items, which are discussed in more detail in the discussion that follows, the remaining increase of $39 million (5%) from the prior year quarter in income before income taxes is primarily attributable to increased performance from our Natural Gas Pipelines business segment and decreased interest expense, net and decreased general and administrative expense partially offset by lower earnings from our CO2 business segment, lower earnings from our Kinder Morgan Canada business segment as a result of the TMPL Sale and increased DD&A.

Non-GAAP Financial Measures

Our non-GAAP performance measures are DCF, both in the aggregate and per share, and Segment EBDA before certain items. Certain items, as used to calculate our non-GAAP measures, are items that are required by GAAP to be reflected in net income, 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).

Our non-GAAP performance measures described below should not be considered alternatives to GAAP net income or other GAAP measures and have important limitations as analytical tools. Our computations of DCF and Segment EBDA before certain items may differ from similarly titled measures used by others. You should not consider these non-GAAP performance measures in isolation or as substitutes for an analysis of our results as reported under GAAP. DCF should not be used as an alternative to net cash provided by operating activities computed under GAAP. Management compensates for the limitations of these non-GAAP performance 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.

DCF

DCF is calculated by adjusting net income available to common stockholders before certain items for DD&A, total book and cash taxes, sustaining capital expenditures and other items. 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 and preferred stock dividends, paying cash taxes and expending sustaining capital, that could be used for discretionary purposes such as common stock dividends, stock repurchases, retirement of debt, or expansion capital expenditures. We believe the GAAP measure most directly comparable to DCF is net income available to common stockholders. A reconciliation of DCF to net income available to common stockholders is provided in the table below. DCF per common share is DCF divided by average outstanding common shares, including restricted stock awards that participate in dividends.

Reconciliation of Net Income Available to Common Stockholders to DCF







                                                                       Three Months Ended March 31,
                                                                       2019                      2018
                                                                  (In millions, except per share amounts)
        Net Income Available to Common Stockholders           $              556         $              485
        Add/(Subtract):
        Certain items before book tax(a)                                      13                         51
        Book tax certain items(b)                                              2                         (3 )
        Impact of 2017 Tax Reform(c)                                           -                        (44 )
        Total certain items                                                   15                          4
        Net Income Available to Common Stockholders before
        certain items                                                        571                        489
        Add/(Subtract):
        DD&A expense(d)                                                      708                        690
        Total book taxes(e)                                                  195                        184
        Cash taxes(f)                                                        (13 )                      (13 )
        Other items(g)                                                        25                         11
        Sustaining capital expenditures(h)                                  (115 )                     (114 )
        DCF                                                   $            1,371         $            1,247
        Weighted average common shares outstanding for
        dividends(i)                                                       2,275                      2,218
        DCF per common share                                  $             0.60         $             0.56
        Declared dividend per common share                    $             0.25         $             0.20
        _______
        


(b) Represents income tax provision on certain items plus discrete income tax items.

(c) 2018 amount represents 2017 Tax Reform provisional adjustments including our share of certain equity investees' 2017 Tax Reform provisional adjustments related to our FERC-regulated business.

(d) Includes DD&A and amortization of excess cost of equity investments. 2019 and 2018 amounts also include $94 million and $88 million, respectively, of our share of certain equity investees' DD&A, net of the noncontrolling interests' portion of KML DD&A and consolidating joint venture partners' share of DD&A.

(e) Excludes book tax certain items of $(2) million and $3 million for 2019 and 2018, respectively. 2019 and 2018 amounts also include $25 million and $17 million, respectively, of our share of taxable equity investees' book taxes, net of the noncontrolling interests' portion of KML book taxes.

(f) 2018 amount includes $(10) million of our share of taxable equity investees' cash taxes.

(g) Includes non-cash pension expense and non-cash compensation associated with our restricted stock program.

(h) 2019 and 2018 amounts include $(19) million and $(16) million, respectively, of our share of (i) certain equity investees'; (ii) KML's; and (iii) certain consolidating joint venture subsidiaries' sustaining capital expenditures.

(i) Includes restricted stock awards that participate in common share dividends.

Segment EBDA Before Certain Items

Segment EBDA before certain items 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 and Revenues before certain items are calculated by adjusting the Segment EBDA and Revenues for the applicable certain item amounts, which are totaled in the tables and described in the footnotes to those tables. Revenues before certain items is provided to further enhance our analysis of Segment EBDA before certain items but is not a performance measure.







        Segment Earnings Results
        Natural Gas Pipelines
                                                                        Three Months Ended March 31,
                                                                       2019                       2018
                                                                 (In millions, except operating statistics)
        Revenues(a)                                           $             2,201         $             2,126
        Operating expenses(b)                                              (1,167 )                    (1,201 )
        Other income                                                            1                           -
        Earnings from equity investments(b)                                   159                         187
        Other, net                                                              9                          16
        Segment EBDA(b)                                                     1,203                       1,128
        Certain items(b)                                                      (2)                         (54 )
        Segment EBDA before certain items                     $             1,201         $             1,074
        Change from prior period                                             Increase/(Decrease)
        Revenues before certain items                         $                89                           4 %
        Segment EBDA before certain items                     $               127                          12 %
        Natural gas transport volumes (BBtu/d)(c)                          36,674                      32,124
        Natural gas sales volumes (BBtu/d)(c)                               2,332                       2,491
        Natural gas gathering volumes (BBtu/d)(c)                           3,301                       2,731
        NGLs (MBbl/d)(c)                                                      121                         116
        _______
        Certain items affecting Segment EBDA
        


(b) In addition to the revenue certain items described in footnote (a) above:







        Other
        (c) Joint venture throughput is reported at our ownership share.
        Below are the changes in both Segment EBDA before certain items and revenues
        before certain items, in the comparable three month periods ended March 31, 2019
        and 2018:
           Three Months Ended March 31, 2019 versus Three Months Ended March 31, 2018
                                                                                                       Revenues before
                                                           Segment EBDA before certain items            certain items
                                                                  increase/(decrease)                increase/(decrease)
                                                                          (In millions, except percentages)
        North Region                                     $          57                18  %       $     42           10  %
        West Region                                                 36                14  %             32           10  %
        Midstream                                                   34                10  %             15            1  %
        South Region                                                (2 )              (1 )%              4            5  %
        Other                                                        2               100  %              2          100  %
        Intrasegment eliminations                                    -                 -  %             (6 )        (60 )%
        Total Natural Gas Pipelines                      $         127                12  %       $     89            4  %
        


The changes in Segment EBDA for our Natural Gas Pipelines business segment are further explained by the following discussion of the significant factors driving Segment EBDA before certain items in the comparable three month periods ended March 31, 2019 and 2018:

West Region's increase of $36 million (14%) was primarily due to higher earnings from EPNG and CIG. EPNG experienced higher volumes in 2019 from increased Permian basin-related activity and associated capacity sales. CIG earnings were higher due to continued growing production in the Denver Julesburg basin;

Midstream's increase of $34 million (10%) was primarily due to increased earnings from South Texas Midstream and KinderHawk Field Services LLC resulting from increased drilling and production in the Eagle Ford and Haynesville basins, respectively; and

South Region's decrease of $2 million (1%) was primarily due to a decrease in earnings from Southern Gulf LNG Company, L.L.C. as a result of a loss of revenues from an arbitration ruling resulting in a contract termination in 2018 partially offset by an increase in earnings from an SNG expansion.







        Products Pipelines
                                                     Three Months Ended March 31,
                                                   2019                         2018
                                              (In millions, except operating statistics)
        Revenues                          $             424             $             442
        Operating expenses(a)                          (166 )                        (193 )
        Earnings from equity investments                 18                            16
        Other, net                                        -                             1
        Segment EBDA(a)                                 276                           266
        Certain items(a)                                 17                            31
        Segment EBDA before certain items $             293             $             297
        Change from prior period                         Increase/(Decrease)
        Revenues                          $             (18 )                          (4 )%
        Segment EBDA before certain items $              (4 )                          (1 )%
        Gasoline(b)                                     980                           978
        Diesel fuel                                     337                           342
        Jet fuel                                        294                           289
        Total refined product volumes(c)              1,611                         1,609
        Crude and condensate(c)                         643                           593
        Total delivery volumes (MBbl/d)               2,254                         2,202
        _______
        


Other

(c) Joint venture throughput is reported at our ownership share.

Below are the changes in both Segment EBDA before certain items and revenues before certain items, in the comparable three month periods ended March 31, 2019 and 2018.

Three Months Ended March 31, 2019 versus Three Months Ended March 31, 2018







                                                                                                    Revenues before
                                                          Segment EBDA before certain items          certain items
                                                                 increase/(decrease)              increase/(decrease)
                                                                        (In millions, except percentages)
        Crude & Condensate                               $          (8 )               (7 )%   $     (23 )        (13 )%
        Southeast Refined Products                                   4                  6  %          (1 )         (1 )%
        West Coast Refined Products                                  -                  -  %           6            4  %
        Total Products Pipelines                         $          (4 )               (1 )%   $     (18 )         (4 )%
        


The changes in Segment EBDA for our Products Pipelines business segment are further explained by the following discussion of the significant factors driving Segment EBDA before certain items in the comparable three month periods ended March 31, 2019 and 2018:

Southeast Refined Products' increase of $4 million (6%) was primarily due to increased equity earnings from Plantation pipeline as a result of increased transportation revenues driven by higher volumes and average tariff rate and an increase in earnings from South East Terminals; and

West Coast Refined Products' earnings were flat as increased earnings from Calnev due to higher revenues as a result of increased tariff rates on deliveries to Nevada were offset by a decrease in earnings from Pacific operations which was

driven by an increase in environmental reserves partially offset by higher revenues primarily due to higher tariff rates at certain locations.







        Terminals
                                                                          Three Months Ended March 31,
                                                                         2019                         2018
                                                                   (In millions, except operating statistics)
        Revenues(a)                                            $              509             $              495
        Operating expenses(b)                                                (216 )                         (207 )
        Earnings from equity investments                                        5                              7
        Other, net                                                              1                              1
        . . .
        


Apr 23, 2019

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