KMI - Kinder Morgan

[ratiman]

It's Rich Kinder. He's a lawyer who's made his entire career exploiting these kinds of loopholes. If it's technically legal but shady and misleading, he's definitely doing it.

[JRM]

Rich Kinder is the chairman of the board, but he's not running the show anymore.  Just the geriatric they wheel our every four months for the investor call.  It would be very disheartening if the rating agencies overlooked off balance sheet arrangements with a Rich Kinder company.

[ratiman]

He's on the investor call? That's even worse. I've never heard of a chairman on the investor call.

[LearningMachine]

Using SNG as an example, here is how KMI is causing SNG debt to disappear off its balance sheet and off its annual reports even though it still exists at the SNG entity level:

 

• 2015 Annual Report: Page 107 lists SNG notes debt of $1,211 million.
  
• 2016 Annual Report: Page 59 says "As of September 1, 2016, SNG had $1,211 million of debt outstanding (including a current portion of $500 million) which is no longer consolidated on our balance sheet."  Page 101 confirms SNG debt disappearing off KMI's Balance Sheet starting 2016, even though it still exists at SNG entity level as Page 59 mentions.
  
• 2017 Annual Report: Page 106 or any other page no longer mentions anything about $1,211 debt still existing at SNG entity level.
  

 

Similarly, for all other equity investments mentioned under "7. Investments" section, you cannot find entity level debt info anywhere in the report.

 

It looks like they have about $33B in debt from consolidated entities and about $44B total for consolidated and unconsolidated entities.  Am I interpreting this wrong?  It would be nice if they broke it out better.  I'm not sure they're trying to hide anything, but rather attempting to simplify their reporting; possibly too much.

 

JRM, for consolidated entities, yes, I see total debt of $33,360M on page 97 of 2019 10K (https://s24.q4cdn.com/126708163/files/doc_financials/2019/q4/km-2019-10k.pdf).

 

Would it be possible to share the exact source (report, page #) where you are seeing $44B total for consolidated & unconsolidated entities?

 

[LearningMachine]

Using SNG as an example, here is how KMI is causing SNG debt to disappear off its balance sheet and off its annual reports even though it still exists at the SNG entity level:

 

• 2015 Annual Report: Page 107 lists SNG notes debt of $1,211 million.
  
• 2016 Annual Report: Page 59 says "As of September 1, 2016, SNG had $1,211 million of debt outstanding (including a current portion of $500 million) which is no longer consolidated on our balance sheet."  Page 101 confirms SNG debt disappearing off KMI's Balance Sheet starting 2016, even though it still exists at SNG entity level as Page 59 mentions.
  
• 2017 Annual Report: Page 106 or any other page no longer mentions anything about $1,211 debt still existing at SNG entity level.
  

 

Similarly, for all other equity investments mentioned under "7. Investments" section, you cannot find entity level debt info anywhere in the report.

 

You could just download the SNG financial statements from KMI's web site to find out how much debt is currently outstanding ($1,214M as of 6/30/20) and multiply that by KMI's ownership percentage.

 

Claiming lack of transparency regarding the financials is pretty suspect considering there are rules about consolidating financials under GAAP and KMI publishes the pipeline company financials on their web site.

 

PeridotCapital, thanks, I think you meant $1,214M as of 12/31/2019, and $914M as of 6/30/2020.  That is what I see for the SNG 2020 Q2 report at https://ir.kindermorgan.com/financials/pipeco-financial-statements/default.aspx.

 

On the same page, I also see the following reports that have additional debt:

• CIG: $628M
  
• EPNG: $760M
  
• TG: $2,240M
  

 

So far, SIG, CIG, EPNG, and TG add up to $4.542 Billion debt outstanding as of 6/30/2020.

 

Now, where do I go to see debt for other unconsolidated entities that are declared under "7. Investments" of KMI 10K, e.g. the following?

• Citrus Corporation
  
• NGPL Holdings
  
• Gulf Coast Express
  
• MEP
  
• Gulf LNG
  
• Plantation Pipeline Company
  
• Utopia Holding LLC
  
• Permian Highway Pipeline
  
• EagleHawk
  
• Watco Companies, LLC
  
• FEP
  
• Ruby
  
• Cortez Pipeline Companies
  
• "All others" that are summarized as such under "7. Investments" of 10K
  

[LearningMachine]

How do they address this in their presentations?  The latest 10-Q shows consolidated debt of ~$33 billion, which is consistent with the net debt figure they use in their latest presentation.  See slide 33 here https://s24.q4cdn.com/126708163/files/doc_presentations/2020/11/November-2020-Investor-Presentation-Vf.pdf

 

The presentation claims they're at ~4.3x net debt to adjusted EBITDA (slide 10), which implies about $7.6 billion in adjusted EBITDA.  Back on slide 33, they show the calculation for getting to adjusted EBITDA of $7.6 billion.  The calculation starts at net income (which includes GAAP reporting with respect to unconsolidated entities) and includes an add back of $487 million named "JV DD&A and income tax expense."  Footnote e explains that this add back "represents unconsolidated JV DD&A and income tax expense, reduced by consolidated JV partner's DD&A". 

 

I read these disclosures as including KMI's proportionare share of unconsolidated JVs' EBITDA for the purposes of calculating the company's adjusted EBITDA but excluding KMI's proportionate share of unconsolidated JV debt when calculating net debt.  Is that correct?

 

KJP, yes, you hit it right on! 

 

In the 10Ks, they are being shady but could argue to be technically correctly by using key words like "EBDA" instead of "EBITDA", and making sure they are covering themselves by saying equity investments are "not consolidated".  However, even there, they list the pipeline mileage from their equity investments, implying they really own a percentage of it, without implying anything about owning percentage of their debt.

 

In the presentations, I feel they are going further than the 10Ks with their shady business.

[longlake95]

Thanks for highlighting this area of the balance sheet... I was always be uncomfortable with the EBDA acronym....now it makes sense...

I really dislike the "adjusted" numbers that almost everyone is using these days too...

Never once, have I seen adjusted numbers lower than GAAP/IFRS.

[peridotcapital]

Using SNG as an example, here is how KMI is causing SNG debt to disappear off its balance sheet and off its annual reports even though it still exists at the SNG entity level:

 

• 2015 Annual Report: Page 107 lists SNG notes debt of $1,211 million.
  
• 2016 Annual Report: Page 59 says "As of September 1, 2016, SNG had $1,211 million of debt outstanding (including a current portion of $500 million) which is no longer consolidated on our balance sheet."  Page 101 confirms SNG debt disappearing off KMI's Balance Sheet starting 2016, even though it still exists at SNG entity level as Page 59 mentions.
  
• 2017 Annual Report: Page 106 or any other page no longer mentions anything about $1,211 debt still existing at SNG entity level.
  

 

Similarly, for all other equity investments mentioned under "7. Investments" section, you cannot find entity level debt info anywhere in the report.

 

You could just download the SNG financial statements from KMI's web site to find out how much debt is currently outstanding ($1,214M as of 6/30/20) and multiply that by KMI's ownership percentage.

 

Claiming lack of transparency regarding the financials is pretty suspect considering there are rules about consolidating financials under GAAP and KMI publishes the pipeline company financials on their web site.

 

PeridotCapital, thanks, I think you meant $1,214M as of 12/31/2019, and $914M as of 6/30/2020.  That is what I see for the SNG 2020 Q2 report at https://ir.kindermorgan.com/financials/pipeco-financial-statements/default.aspx.

 

On the same page, I also see the following reports that have additional debt:

• CIG: $628M
  
• EPNG: $760M
  
• TG: $2,240M
  

 

So far, SIG, CIG, EPNG, and TG add up to $4.542 Billion debt outstanding as of 6/30/2020.

 

Now, where do I go to see debt for other unconsolidated entities that are declared under "7. Investments" of KMI 10K, e.g. the following?

• Citrus Corporation
  
• NGPL Holdings
  
• Gulf Coast Express
  
• MEP
  
• Gulf LNG
  
• Plantation Pipeline Company
  
• Utopia Holding LLC
  
• Permian Highway Pipeline
  
• EagleHawk
  
• Watco Companies, LLC
  
• FEP
  
• Ruby
  
• Cortez Pipeline Companies
  
• "All others" that are summarized as such under "7. Investments" of 10K
  

 

No, the debt is $1.214B for both periods on that SNG document. As for other entities, I would suggest looking at their JV partners as well.  Depending on the ownership % and origins of each asset, KMI might not be the reporting party for every entity they own an interest in.

 

In addition, for those who seem to be concerned about KMI reporting profits from JV's but ignoring the debt, keep in mind how equity investments show up on balance sheets; they are carried as an asset. You will see equity investments listed in the asset section of the balance sheet, but the debt of those entities won't be shown in the liability section. Why? Because the equity investment is being carried on a "net" basis and is valued as such (after debt is factored in).

 

You see this a lot with real estate. A company owns a 25% equity interest in a building, for which let's say they paid $250M, and carries it on their balance sheet for that same amount. This does not mean that the building is worth $1 billion. Instead, it means the building's equity is worth $1 billion. The building could be worth $2B with a $1B mortgage on it. In this case, let's say the building is sold for $2B. The company that owns 25% does not get paid out $500M, instead they will only collect $250M because the debt holders get paid first.  In examples like this, you see an asset on the balance sheet (and income from that asset) but you see no debt (or interest expense) reported alongside it. That is because the income generated and the asset value on the balance sheet are calculated after debt service has been covered.

 

It can work the same way for a pipeline. A pipeline with debt on it generates operating cash flow, then pays debt service, and then any cash left over would be profit attributable to equity holders.  If you reported the profit after debt service on your income statement, but also added all of the asset's debt onto your own balance sheet, you would be double counting the debt and underestimated the value of your equity ownership stake.

[KJP]

Using SNG as an example, here is how KMI is causing SNG debt to disappear off its balance sheet and off its annual reports even though it still exists at the SNG entity level:

 

• 2015 Annual Report: Page 107 lists SNG notes debt of $1,211 million.
  
• 2016 Annual Report: Page 59 says "As of September 1, 2016, SNG had $1,211 million of debt outstanding (including a current portion of $500 million) which is no longer consolidated on our balance sheet."  Page 101 confirms SNG debt disappearing off KMI's Balance Sheet starting 2016, even though it still exists at SNG entity level as Page 59 mentions.
  
• 2017 Annual Report: Page 106 or any other page no longer mentions anything about $1,211 debt still existing at SNG entity level.
  

 

Similarly, for all other equity investments mentioned under "7. Investments" section, you cannot find entity level debt info anywhere in the report.

 

You could just download the SNG financial statements from KMI's web site to find out how much debt is currently outstanding ($1,214M as of 6/30/20) and multiply that by KMI's ownership percentage.

 

Claiming lack of transparency regarding the financials is pretty suspect considering there are rules about consolidating financials under GAAP and KMI publishes the pipeline company financials on their web site.

 

PeridotCapital, thanks, I think you meant $1,214M as of 12/31/2019, and $914M as of 6/30/2020.  That is what I see for the SNG 2020 Q2 report at https://ir.kindermorgan.com/financials/pipeco-financial-statements/default.aspx.

 

On the same page, I also see the following reports that have additional debt:

• CIG: $628M
  
• EPNG: $760M
  
• TG: $2,240M
  

 

So far, SIG, CIG, EPNG, and TG add up to $4.542 Billion debt outstanding as of 6/30/2020.

 

Now, where do I go to see debt for other unconsolidated entities that are declared under "7. Investments" of KMI 10K, e.g. the following?

• Citrus Corporation
  
• NGPL Holdings
  
• Gulf Coast Express
  
• MEP
  
• Gulf LNG
  
• Plantation Pipeline Company
  
• Utopia Holding LLC
  
• Permian Highway Pipeline
  
• EagleHawk
  
• Watco Companies, LLC
  
• FEP
  
• Ruby
  
• Cortez Pipeline Companies
  
• "All others" that are summarized as such under "7. Investments" of 10K
  

 

No, the debt is $1.214B for both periods on that SNG document. As for other entities, I would suggest looking at their JV partners as well.  Depending on the ownership % and origins of each asset, KMI might not be the reporting party for every entity they own an interest in.

 

In addition, for those who seem to be concerned about KMI reporting profits from JV's but ignoring the debt, keep in mind how equity investments show up on balance sheets; they are carried as an asset. You will see equity investments listed in the asset section of the balance sheet, but the debt of those entities won't be shown in the liability section. Why? Because the equity investment is being carried on a "net" basis and is valued as such (after debt is factored in).

 

You see this a lot with real estate. A company owns a 25% equity interest in a building, for which let's say they paid $250M, and carries it on their balance sheet for that same amount. This does not mean that the building is worth $1 billion. Instead, it means the building's equity is worth $1 billion. The building could be worth $2B with a $1B mortgage on it. In this case, let's say the building is sold for $2B. The company that owns 25% does not get paid out $500M, instead they will only collect $250M because the debt holders get paid first.  In examples like this, you see an asset on the balance sheet (and income from that asset) but you see no debt (or interest expense) reported alongside it. That is because the income generated and the asset value on the balance sheet are calculated after debt service has been covered.

 

It can work the same way for a pipeline. A pipeline with debt on it generates operating cash flow, then pays debt service, and then any cash left over would be profit attributable to equity holders.  If you reported the profit after debt service on your income statement, but also added all of the asset's debt onto your own balance sheet, you would be double counting the debt and underestimated the value of your equity ownership stake.

 

I don't think anyone is disputing the accuracy of KMI's GAAP accounting.  Instead, I believe two points are being made:  (i) accurate GAAP accounting can still conceal significant leverage at the unconsolidated JV level; and (ii) KMI's presentations are arguably misleading, because they trumpet a net debt to adjusted EBITDA number that includes KMI's proportionate share of unconsolidated adjusted EBITDA but excludes KMI's proportionate share of unconsolidated JV debt.  Do you think either of those points are inaccurate?

 

Point (ii) also makes me question the purported leverage reduction show in slide 10 here:  https://s24.q4cdn.com/126708163/files/doc_presentations/2020/11/November-2020-Investor-Presentation-Vf.pdf

 

How much of what is shown is actual leverage reduction versus moving assets into unconsolidated JVs so they can count their proportionate share of EBITDA while excluding all debt?  I suspect this is answerable by looking at their transactions over the last five years, but I don't own this so haven't done the work to find out.

 

As for the comparison to real estate companies, the ones I follow, e.g., Vornado, include both the proportionate NOI and the proportionate debt from unconsolidated JVs when they report non-GAAP numbers.

[peridotcapital]

 

I don't think anyone is disputing the accuracy of KMI's GAAP accounting.  Instead, I believe two points are being made:  (i) accurate GAAP accounting can still conceal significant leverage at the unconsolidated JV level; and (ii) KMI's presentations are arguably misleading, because they trumpet a net debt to adjusted EBITDA number that includes KMI's proportionate share of unconsolidated adjusted EBITDA but excludes KMI's proportionate share of unconsolidated JV debt.  Do you think either of those points are inaccurate?

 

Point (ii) also makes me question the purported leverage reduction show in slide 10 here:  https://s24.q4cdn.com/126708163/files/doc_presentations/2020/11/November-2020-Investor-Presentation-Vf.pdf

 

How much of what is shown is actual leverage reduction versus moving assets into unconsolidated JVs so they can count their proportionate share of EBITDA while excluding all debt?  I suspect this is answerable by looking at their transactions over the last five years, but I don't own this so haven't done the work to find out.

 

As for the comparison to real estate companies, the ones I follow, e.g., Vornado, include both the proportionate NOI and the proportionate debt from unconsolidated JVs when they report non-GAAP numbers.

 

Why not just avoid using "adjusted" anything when analyzing companies? Comparing non-GAAP numbers across various companies seems like a waste of time to me. I would agree these metrics are misleading but we don't need them to calculate leverage. If KMI's "adjusted EBITDA" to "consolidated net debt" is not apples to apples (I can't comment, as I don't care about "adjusted" metrics), then simply ignore it.

 

My point about how GAAP accounting works is that you can use it to better calculate things on more of an apples to apples basis. For instance, if we use KMI's "consolidated net debt" and compare it to a cash flow calculation that has accounted for JV income after covering debt service, isn't that a better way to approach it? 

 

I think we can all agree that the use of non-GAAP/adjusted metrics is crap, but there are easy ways to ignore them. Another obvious example is adjusted EBITDA for tech companies that exclude stock-based comp from their metrics. Drives me crazy? Yup. Misleading? Yup. Easy to factor into one's valuation and/or leverage calculations? Yup.

 

 

[LearningMachine]

No, the debt is $1.214B for both periods on that SNG document.

 

Please see Page 2 of SNG 2020 Q2 Report at https://s24.q4cdn.com/126708163/files/doc_financials/2020/q2/SNG-2020.6.30-GAAP-Final-as-issued.pdf.

 

Picture attached showing debt of $914 M as of June 30, 2020.

[LearningMachine]

For instance, if we use KMI's "consolidated net debt" and compare it to a cash flow calculation that has accounted for JV income after covering debt service, isn't that a better way to approach it? 

 

That is not enough because you also want to find out the risk of entity going under due to debt by looking at Total Debt, especially when you are looking at an entity that already has too much debt at claimed 4.x times parent-level-only Debt to full EBIDA that includes cashflow from equity investments, and especially an entity that is run by someone who was involved with Enron, which went bankrupt for having too much debt and for hiding debt in subsidiaries.

 

Another issue here is that they are purposely trying to move debt from parent to subsidiary companies and purposely going down to non-controlling 50% ownership for those subsidiary companies to prevent the debt from showing up on parent's balance sheet.

 

The risk from so much debt can explode very quickly, maybe even to bankruptcy like Enron's, if there is a big disruption that causes them to not be able to renew their debt, e.g. reputational risk of something like what we are talking getting covered in media, SEC announcement or shareholder lawsuit, interest rate spike, pipeline accident, sudden new regulation, etc.

[LearningMachine]

You see this a lot with real estate. A company owns a 25% equity interest in a building, for which let's say they paid $250M, and carries it on their balance sheet for that same amount. This does not mean that the building is worth $1 billion. Instead, it means the building's equity is worth $1 billion. The building could be worth $2B with a $1B mortgage on it. In this case, let's say the building is sold for $2B. The company that owns 25% does not get paid out $500M, instead they will only collect $250M because the debt holders get paid first.  In examples like this, you see an asset on the balance sheet (and income from that asset) but you see no debt (or interest expense) reported alongside it. That is because the income generated and the asset value on the balance sheet are calculated after debt service has been covered.

 

It can work the same way for a pipeline. A pipeline with debt on it generates operating cash flow, then pays debt service, and then any cash left over would be profit attributable to equity holders.  If you reported the profit after debt service on your income statement, but also added all of the asset's debt onto your own balance sheet, you would be double counting the debt and underestimated the value of your equity ownership stake.

 

I'd be ok with an ownership structure like this, i.e. the parent company invests in a lot of equity positions in multiple pipeline companies, each of which have debt of their own.  However, then, I expect the parent company to not have additional debt at parent company level.  In fact, that would be my ideal ownership structure for natural gas pipelines.

 

What KMI seems to be doing is having debt within pipeline companies (which they are not fully transparent about), but then also having a LOT of debt at the parent company level.

[lnofeisone]

No, the debt is $1.214B for both periods on that SNG document.

 

Please see Page 2 of SNG 2020 Q2 Report at https://s24.q4cdn.com/126708163/files/doc_financials/2020/q2/SNG-2020.6.30-GAAP-Final-as-issued.pdf.

 

Picture attached showing debt of $914 M as of June 30, 2020.

 

300M is due this year so it moved to current debt.

[LearningMachine]

No, the debt is $1.214B for both periods on that SNG document.

 

Please see Page 2 of SNG 2020 Q2 Report at https://s24.q4cdn.com/126708163/files/doc_financials/2020/q2/SNG-2020.6.30-GAAP-Final-as-issued.pdf.

 

Picture attached showing debt of $914 M as of June 30, 2020.

 

300M is due this year so it moved to current debt.

 

Got it, thanks Inofeisone.

[lnofeisone]

 

Now, where do I go to see debt for other unconsolidated entities that are declared under "7. Investments" of KMI 10K, e.g. the following?

• Citrus Corporation
  
• NGPL Holdings
  
• Gulf Coast Express
  
• MEP
  
• Gulf LNG
  
• Plantation Pipeline Company
  
• Utopia Holding LLC
  
• Permian Highway Pipeline
  
• EagleHawk
  
• Watco Companies, LLC
  
• FEP
  
• Ruby
  
• Cortez Pipeline Companies
  
• "All others" that are summarized as such under "7. Investments" of 10K
  

 

All this information is available but you will have to do a lot of digging including counter-party risk. To be honest, I'd recommend subscribing to Moody's, S&P, or Bloomberg.

 

It's been a while since I looked at these but If I recall correctly, Ruby is one of the dicier pipelines with PG&E being a big customer and something like 30% of uncontracted capacity.  It's in compliance so at a minimum you know it's under debt/ebitda of 5. It also hurts that KMI that Pembina has preferred ownership (i.e., gets paid its dividend first). KMI also signaled deterioration here in January of 2020. It had about 800M with a big payment (200M or so) coming in March 2021. No real issues for 2021 but beyond that, it would be good for KMI to recontract here.

 

Watco has about 900M but has debt/ebidta of about 3 but Watco is a tiny JV for KMI.

 

This exercise will take a while and I'd say KMI has been fairly balanced signaling when they have issues at subsidiary levels. Also, not very hard to see the counterparties and see if they are in trouble.

[peridotcapital]

For instance, if we use KMI's "consolidated net debt" and compare it to a cash flow calculation that has accounted for JV income after covering debt service, isn't that a better way to approach it? 

 

That is not enough because you also want to find out the risk of entity going under due to debt by looking at Total Debt, especially when you are looking at an entity that already has too much debt at claimed 4.x times parent-level-only Debt to full EBIDA that includes cashflow from equity investments, and especially an entity that is run by someone who was involved with Enron, which went bankrupt for having too much debt and for hiding debt in subsidiaries.

 

Another issue here is that they are purposely trying to move debt from parent to subsidiary companies and purposely going down to non-controlling 50% ownership for those subsidiary companies to prevent the debt from showing up on parent's balance sheet.

 

The risk from so much debt can explode very quickly, maybe even to bankruptcy like Enron's, if there is a big disruption that causes them to not be able to renew their debt, e.g. reputational risk of something like what we are talking getting covered in media, SEC announcement or shareholder lawsuit, interest rate spike, pipeline accident, sudden new regulation, etc.

 

Enron was a fraud. Should we not invest in EOG Resources because it used to be part of Enron? Comparing cooking the books to selling 50% of a pipeline to a JV partner makes absolutely no sense.

 

Your notion that they are only selling JV interests to hide debt is confusing. If they sell a 50% interest and use the capital raised to reduce corporate level debt, it is entirely possible that total debt attributable to KMI could go down (depends how leveraged the asset is and how strong the sale price is). The company's shareholders are de-risked in that case, as parent level debt goes down and the JV partner is now on the hook for their share of the debt. If the JV goes under, the impact on KMI is less than it would have been had they owned the whole thing. And how would a JV going under be able to bring down the entire KMI entity?

Selling assets to reduce leverage is a good thing!

 

Rather than trying to convince yourself they are purposely trying to trick their investor base, I would suggest focusing on the cash generation of the business relative to the debt service and the public market value to determine if they really are overleveraged to a point where the equity does not offer an attractive risk/reward. That is a far more important question than simply looking at the leverage ratio in isolation, or concluding that by selling assets they are trying to hide something.

 

FD: Long KMI at $12+change.

[ratiman]

Kinder has been doing this his entire career. It wasn't just Enron, the entire KMI/KMP/KMR complex was built on hidden-in-plain sight, technically legal misdirection. Everybody knew about it except Jim Cramer and retail investors.

 

Here is an item on Kinder's debt pyramids back in 2002.

 

http://www.mcdep.com/kmpinmr20408.htm

 

During the 1920s when the stock market boomed in similar fashion as in the 1990s, pyramid ownership forms apparently became popular in the energy infrastructure industry.  A company at the top of the pyramid owned a portion of the shares in companies at the second level.  A company at the second level in turn owned a portion of the shares of companies in the third level.  The company at the top exerted control over all the companies lower in the pyramid.

 

Magnified control also meant magnified leverage through borrowing at each level of the pyramid.  When business slowed, the pyramids collapsed under the burden of excessive debt.  Investors lost great sums.

 

The bust brought recrimination and a host of new regulations including the Public Utility Holding Company Act.  Pyramids were severely curtailed in the energy infrastructure industry.

 

The pyramid is back in energy infrastructure.  KMI sits atop a pyramid with KMP and KMR and other KMI investments at the second level and about a billion dollars of KMP investments in pipelines at the third level.  Our ratio of debt for KMI of 0.78 includes KMP debt from the second level of the pyramid, but none of the debt from the third level or from other second level KMI investments.  Only AES, among Mid Cap and larger companies in our coverage, has a ratio of debt higher than KMI.

 

Pyramids are not inherently bad and debt is a vital tool to promote economic growth.  Using a pyramid structure to disguise too much debt can be deceptive.  Too much debt is a condition investors can readily avoid if they recognize it.

[LearningMachine]

For instance, if we use KMI's "consolidated net debt" and compare it to a cash flow calculation that has accounted for JV income after covering debt service, isn't that a better way to approach it? 

 

That is not enough because you also want to find out the risk of entity going under due to debt by looking at Total Debt, especially when you are looking at an entity that already has too much debt at claimed 4.x times parent-level-only Debt to full EBIDA that includes cashflow from equity investments, and especially an entity that is run by someone who was involved with Enron, which went bankrupt for having too much debt and for hiding debt in subsidiaries.

 

Another issue here is that they are purposely trying to move debt from parent to subsidiary companies and purposely going down to non-controlling 50% ownership for those subsidiary companies to prevent the debt from showing up on parent's balance sheet.

 

The risk from so much debt can explode very quickly, maybe even to bankruptcy like Enron's, if there is a big disruption that causes them to not be able to renew their debt, e.g. reputational risk of something like what we are talking getting covered in media, SEC announcement or shareholder lawsuit, interest rate spike, pipeline accident, sudden new regulation, etc.

 

Enron was a fraud. Should we not invest in EOG Resources because it used to be part of Enron? Comparing cooking the books to selling 50% of a pipeline to a JV partner makes absolutely no sense.

 

Your notion that they are only selling JV interests to hide debt is confusing. If they sell a 50% interest and use the capital raised to reduce corporate level debt, it is entirely possible that total debt attributable to KMI could go down (depends how leveraged the asset is and how strong the sale price is). The company's shareholders are de-risked in that case, as parent level debt goes down and the JV partner is now on the hook for their share of the debt. If the JV goes under, the impact on KMI is less than it would have been had they owned the whole thing. And how would a JV going under be able to bring down the entire KMI entity?

Selling assets to reduce leverage is a good thing!

 

Rather than trying to convince yourself they are purposely trying to trick their investor base, I would suggest focusing on the cash generation of the business relative to the debt service and the public market value to determine if they really are overleveraged to a point where the equity does not offer an attractive risk/reward. That is a far more important question than simply looking at the leverage ratio in isolation, or concluding that by selling assets they are trying to hide something.

 

FD: Long KMI at $12+change.

 

I actually agree with you that the step to move debt under a JV entity is actually a good step that serves the unitholders by lowering the risk.

 

What I'm trying to get a sense of is true Total Debt to EBITDA ratio.  I think the ratio is much higher than 4.x when you start including all debt.  Does anyone know the actual figure?

 

The other thing that bothers me is their shadiness in their slide-decks and earnings calls where they claim Debt-to-EBITDA of 4.x, implying that it is total debt when it is not.  Why not be fully honest and upfront?  When someone is not being fully honest, you wonder what else they are hiding.  As Buffett said: "There is seldom one cockroach in the kitchen."

[LearningMachine]

Your notion that they are only selling JV interests to hide debt is confusing.

I did not say that is the only purpose.

[peridotcapital]

 

I'd be ok with an ownership structure like this, i.e. the parent company invests in a lot of equity positions in multiple pipeline companies, each of which have debt of their own.  However, then, I expect the parent company to not have additional debt at parent company level.  In fact, that would be my ideal ownership structure for natural gas pipelines.

 

What KMI seems to be doing is having debt within pipeline companies (which they are not fully transparent about), but then also having a LOT of debt at the parent company level.

 

Here you are making an argument that they should be pursuing JVs to increase JV-level debt and minimize parent company debt, which is exactly what they are doing with these transactions!

 

I understand you think they are misleading on leverage. But the "true" debt/EBITDA ratio is in the eyes of each investor since we can come up with different ways of calculating both "debt" and "EBITDA." If we instead focus on actual cash generation, we can see if it appears as if they have too much debt or not. Whether the actual ratio is 4.0x or 5.0x (I don't either is inherently too much for a pipeline company) doesn't really matter because EBITDA is a not a measure of actual cash generation that can be used to cover debt service. I think free cash flow and the dividend payout ratio are far more critical in evaluating their leverage, regardless of the ratio.

 

After all of that, if you still care about leverage ratios, how the rating agencies calculate it is probably more important that how we might.

[peridotcapital]

 

I actually agree with you that the step to move debt under a JV entity is actually a good step that serves the unitholders by lowering the risk.

 

What I'm trying to get a sense of is true Total Debt to EBITDA ratio.  I think the ratio is much higher than 4.x when you start including all debt.  Does anyone know the actual figure?

 

The other thing that bothers me is their shadiness in their slide-decks and earnings calls where they claim Debt-to-EBITDA of 4.x, implying that it is total debt when it is not.  Why not be fully honest and upfront?  When someone is not being fully honest, you wonder what else they are hiding.  As Buffett said: "There is seldom one cockroach in the kitchen."

 

Just glancing at their "adjusted EBITDA" calculation I don't see where they are adding back interest from the unconsolidated JVs to arrive at EBITDA. Is this your main contention with their leverage calculation -- that they are adding JV interest to EBITDA while not simultaneously adding JV net debt to the total net debt figure? Is it possible they are doing neither and thus it is apples to apples?

 

 

[LearningMachine]

 

I'd be ok with an ownership structure like this, i.e. the parent company invests in a lot of equity positions in multiple pipeline companies, each of which have debt of their own.  However, then, I expect the parent company to not have additional debt at parent company level.  In fact, that would be my ideal ownership structure for natural gas pipelines.

 

What KMI seems to be doing is having debt within pipeline companies (which they are not fully transparent about), but then also having a LOT of debt at the parent company level.

 

Here you are making an argument that they should be pursuing JVs to increase JV-level debt and minimize parent company debt, which is exactly what they are doing with these transactions!

 

I understand you think they are misleading on leverage. But the "true" debt/EBITDA ratio is in the eyes of each investor since we can come up with different ways of calculating both "debt" and "EBITDA." If we instead focus on actual cash generation, we can see if it appears as if they have too much debt or not. Whether the actual ratio is 4.0x or 5.0x (I don't either is inherently too much for a pipeline company) doesn't really matter because EBITDA is a not a measure of actual cash generation that can be used to cover debt service. I think free cash flow and the dividend payout ratio are far more critical in evaluating their leverage, regardless of the ratio.

 

After all of that, if you still care about leverage ratios, how the rating agencies calculate it is probably more important that how we might.

 

Yes, I'm in favor of putting debt under other entities to keep the parent safe and debt-free. Just be honest and upfront about the debt you're putting under other entities, and keep sharing the debt reported by those entities to you.

 

The reason it matters whether the source of cash-flow is truly unlevered or already levered is because unlevered cashflow can survive disruptions and can re-continue after disruption, while disruption in levered cashflow can bring down the levered entity permanently causing permanent loss of capital invested in that entity.  I'd like to know the debt amount so that I can figure out how much levered I am, i.e. how much risk I am taking of going under during disruption.

 

For sake of your argument, let's say the subsidiaries combined have $100 Billion of debt, and we ignore it, and we just focus on the cashflow coming out of them, and we say oh well, cash flow can service the parent company's $33 Billion debt fine.  Now, when you have a disruption happen, and subsidiaries are not able to provide the cashflow, and you're in the market to try to renew debt, everything comes crumbling down.  To avoid that, I'm not saying put that $100 Billion of debt in the parent company to let it have $133 Billion total debt.  What I'm saying is ideally you have only $33 Billion of total debt, and that too only in the subsidiaries that don't have a way to reach the parent upon default.  If that is not the case, at least let me know exactly what debt you have in both parent and subs so that I can do the math based on that.

 

Overall, I'd like to be able to buy natural gas pipelines at a certain multiple of unlevered EBITDA, and when the holding companies are not being honest, it is hard to do that math.

[kab60]

Perhaps this Fitch analysis is worth a look for anyone interested (there's also a bit on WMB): https://www.fitchratings.com/research/corporate-finance/fitch-affirms-kinder-morgan-inc-at-bbb-outlook-stable-29-05-2020

 

They are aware of the unconsolidated leverage at JVs fyi.

[peridotcapital]

Perhaps this Fitch analysis is worth a look for anyone interested (there's also a bit on WMB): https://www.fitchratings.com/research/corporate-finance/fitch-affirms-kinder-morgan-inc-at-bbb-outlook-stable-29-05-2020

 

They are aware of the unconsolidated leverage at JVs fyi.

 

Seems very reasonable that Fitch does not include unconsolidated JV equity income in their EBITDA calculations, but rather uses the actual amount of the cash distributions that KMI receives from them instead (the accounting income not available to service debt, but rather the cash that is).