George Thoreson

About the Author George Thoreson

I'm a bottom-up value investor and invest in companies selling below their intrinsic value, often because they are out of favor, ignored or in a special situation. Searching for value leads to interesting companies that are out of favor for many possible reasons. Studying successful value investors and learning from my own mistakes the merits of value investing, over the long term, became apparent. After becoming a value investor my results improved. Sure, I still make mistakes, but on average I’ve been fortunate in getting more right than wrong. My investing approach is covered on my blog; The share price of a company often have nothing to do with the underlying value of the company the shares represent. So, I look for investments that are priced low relative to their true or intrinsic value so they provide a margin of safety. Then we must patiently wait, as an owner of the company, until the share price catches up to reflect the underlying value.

Kinder Morgan Inc Reports Solid 1Q15 Results (KMI)

Kinder Morgan Inc (NYSE:KMI), first quarter 2015 report (1Q15) is solid [Source]. While KMI is up about 30% since our initial purchase in October 2014, at the current share price level of about $43/share it still offers a strong potential return with a healthy margin of safety. We believe the company is on track to achieve $60-70 per share in the next 3-5 years while we are paid an additional $6-12 per share dividend while we wait for these total returns averaging about 26% per year. As an infrastructure company, KMI offers many desirable investment characteristics and is still an attractive buy with a 30% margin of safety.

Distributable cash flow (DCF) is Kinder Morgan’s preferred measure of cash flow and a good metric for us to follow. It is a measure of funds available for payment of dividends to shareholders. Our investment thesis anticipates KMI’s total return will be realized from dividend income growth and the resultant share price appreciation.

KMI reported 1Q15 distributable cash flow before certain items of $1.242 billion versus $573 million for the comparable period in 2014. This increase is attributable in part to the KMI merger transactions completed in November 2014. On a per share basis DCF was $0.58 compared to $0.55 for 1Q14.

KMI Logo

Net income for 1Q15 before certain items was $445 million compared to $624 million for the 1Q14. Net income was $459 million compared to $601 million for the 1Q14, a decrease in net income before certain items that was driven by higher interest expense, book taxes and depreciation, depletion and amortization (DD&A) expense.

The drivers of our investment thesis [Source] in Kinder Morgan Inc., are easy to track with KMI. The shareholder friendly management who own shares along side of us naturally follow the same things we follow. For example KMI opens their 1Q15 report announcing:

  • KMI on Track to Meet its Full-Year Dividend Target of $2 Per Share”, and;
  • Generated $206 Million in Cash Coverage in Excess of Declared Dividends in the Quarter.”


  • KMI board of directors approved an increase in its quarterly cash dividend to $0.48 ($1.92 annualized) payable on May 15, 2015, to shareholders of record as of the close of business on April 30, 2015.
  • This is a 14 percent increase over the first quarter 2014 dividend of $0.42 per share ($1.68 annualized) and up from $0.45 per share ($1.80 annualized) for the fourth quarter of 2014.

Chairman and CEO Richard D. Kinder’s Summary (underline added for emphasis):

  • “Despite some headwinds due primarily to a rough commodity pricing environment, KMI had a good first quarter and will increase its dividend to $0.48 per share;
  • We remain on track to meet our full-year dividend target of $2.00 per share.
  • Our first quarter performance demonstrated once again that our large diversified portfolio of mostly fee-based assets can produce good results even in tumultuous market conditions.
  • We earned distributable cash flow before certain items of $0.58 per share for the first quarter, which equates to coverage in excess of our dividends of $206 million.
  • Our five business segments produced $1.912 billion in segment earnings before DD&A and certain items, in line with the first quarter 2014, primarily driven by increases in our Products Pipelines and Terminals segments offsetting a decline in our CO2 segment.
  • We also completed the approximately $3.1 billion acquisition of Hiland Partners on Feb. 13, 2015.
  • This transaction establishes a premier midstream platform for us in the Bakken, with a significant amount of acreage dedicated under long-term gathering agreements with some of the Bakken’s largest and most successful producers.”

Capital Backlog:

The backlog of expansion projects and investments is a leading indicator of future returns on investment to ensure growing cash flows. Management reported the following:

  • The current project backlog of expansion and joint venture investments is $18.3 billion.
  • Beginning 1Q15 the project backlog includes capitalized overhead which added approximately $850 million to reflect the total investment in projects.
  • Without this adjustment, the project backlog decreased by approximately $200 million from the 4Q14 earnings release.
  • Since the 4Q14 earnings release, nearly $400 million of completed project placed into service.
  • Removed approximately $900 million in projects, primarily in the CO2 segment as projects are delayed due to lower commodity prices.
  • Added approximately $1.1 billion new projects.
  • “Projects in the backlog have a high certainty of completion and drive future growth at the company across all business segments.”

Consolidation Merger Paying Off:

The November 2014 completion of the consolidation merger simplified the company and lowered the cost of capital. This is playing out as anticipated and will improve returns on investment for growth in investment, cash flow and dividends for many years to come.


The announced 14% dividend increase and management’s affirmation of the projected 10% dividend growth rate through our 3-5 year investment horizon was during a difficult period as energy prices declined. This attests to the advantages of KMI’s size and the resilience of their “toll road” business model. Our investment thesis is on track, KMI offers many desirable investment characteristics and is still an attractive buy with a 30% margin of safety.

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