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Kinder Morgan (NYSE: KMI) recently reported solid first-quarter results. The midstream giant's cash flow came in slightly ahead of budget thanks to strong execution. That keeps it on pace to achieve its full-year forecast.
The company takes great care in how it allocates this cash. That was a key theme on the accompanying conference call when CEO Steve Kean walked investors through the company's four guiding principles.
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1. We're committed to having a strong balance sheet
Kean spent most of his time on the call discussing how well the company performed in following its principles. He started by stating that "we have a strong balance sheet, having met our approximately 4.5 times target of debt-to-EBITDA." Kinder Morgan has worked hard to improve its financial profile in recent years. It capped things off last year by selling the Trans Mountain Pipeline in Canada and using most of that cash to pay down debt.
Founder and executive chairman Rich Kinder went through a bit more detail on the company's progress during the call. He stated that "we had used that cash (free cash flow and asset sale proceeds) to get our balance sheet in shape, having paid off over $8 billion of debt and received credit upgrade from both S&P and Moody's, and we intend to maintain our improved credit metrics." By strengthening its balance sheet, Kinder Morgan has lowered its borrowing costs and improved its access to credit. That gives it significantly more financial flexibility.
2. We're maintaining discipline by focusing on investment returns
Kean followed up his balance sheet comments by noting that "we're maintaining our capital discipline through our return criteria, a good track record of execution, and by self-funding our investments." He went on to say:
We're very careful with your capital. We don't swing at every pitch. We definitely have our hits and misses, but we have shown that in aggregate we do well. We get there by having elevated return criteria well above our cost of capital. We focused on projects that we understand and primarily focus on expansions off of our existing footprint. All of this helps us invest for returns that are well above our cost of capital and helps overcome the inevitable curveballs that come up during project execution.
The company demonstrated this discipline recently by walking away from a proposed joint venture with Enbridge (NYSE: ENB). Kinder Morgan initially agreed to partner with Enbridge and Oiltanking to build Texas COLT, which would have exported oil from an offshore terminal. However, that project didn't fully align with Kinder Morgan's strategic priorities. As a result, it sold its share to Enbridge.