KMI Kinder Morgan, Inc. Sector: Energy HOLD

Transcription

1 Analysts: Aleck Boyd, Dario Munoz Poletti, Bernadette Smith and Sara Specht Washburn University Applied Portfolio Management KMI Sector: Energy HOLD Report Date: 4/18/2016 Market Cap (mm) $39,563 Annual Dividend $ Yr Beta (S&P 500 Index) 1.35 Return on Capital 2.7% Dividend Yield 8.9% Annualized Alpha 71.2% Compared With: EPS (ttm).10 Price/Earnings (ttm) Institutional Ownership 5.2% ONEOK Partners, L.P. Current Price $18.09 Economic Value Added (ttm) $497 Short Interest (% of Shares) 2.6% Williams Companies, Inc. 12 mo. Target Price $19.50 Free Cash Flow Margin 3.7% Days to Cover Short 1.3 and the S&P 500 Index Business Description operates as an energy infrastructure company in North America. It operates through Natural Gas Pipelines, CO2, Terminals, Products Pipelines, Kinder Morgan Canada, and Other segments. The Natural Gas Pipelines segment owns and operates interstate and intrastate natural gas pipeline and storage systems; natural gas and crude oil gathering systems, and natural gas processing and treating facilities; natural gas liquids fractionation facilities and transportation systems; and liquefied natural gas facilities. The CO2 segment produces, transports, and markets CO2 for use in enhanced oil recovery projects; and owns interests in oil producing fields, gas processing plants, and crude oil pipelines in the Permian Basin region of West Texas. The Investment Thesis Due to declining oil prices Kinder Morgan experienced a decline in revenues, and a decrease in net income due a one time tax adjustment from an acquisition and unusual litigation expenses. Even with unfavorable oil prices the analysis confirms that Kinder Morgan has held up to the previous investment thesis. Despite negative impacts in 2015, the firm's long term strategic acquisition plan and strong commitment to dividends supports Kinder Morgan's long term fundamentals, which include helping customers to provide safe and reliable energy, bulk commodity and liquids product transportation, storage and distribution. Kinder Morgan's intentions to expand, strong commitment to dividends, and positive future outlook justifies a hold on Kinder Morgan stock. ANNUALIZED 3 YEAR CAGR Total Revenue 13. Free Cash Flow 369.5% EBIT 11.4% Total Invested Capital 8.6% NOPAT 25.3% Total Assets 7.2% Earnings Per Share 30.7% Economic Value Added 170.6% Dividends Per Share 4.7% Market Value Added 151.5% % 8% 7% 6% 5% 4% 3% 2% 1% KMI OKS WMB KMI ^SPX ROA ROE ROIC Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield Per Share Metrics Earnings Dividends NOPAT Free Cash Flow 17.3% 29.8% 27.7% 27.6% 28.6% N/A 110.8% 12.7% 6.6% 3.7% 2.6% % 2.1% 0.8% 3.3% % 4.1% 10.8% N/A (12.18) (1.72) 0.94 (0.25) $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 EBIT Net Operating Profit After Tax $2,500 $2,000 $1,500 $1,000 $500 $500 $1,000 Economic Value Added Market Valued Added $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $5, Price/Earnings Price/Free Cash Flow Datasource: Capital IQ

2 KMI Sector Energy ONEOK Partners, L.P. OKS Sector Energy Income Statement Highlights Income Statement Highlights Total Revenue 7,943 9,973 14,070 16,226 14,403 Total Revenue 11,323 10,182 11,869 12,192 7,761 Cost of Goods Sold 4,769 4,759 7,365 8,435 6,452 Cost of Goods Sold 9,745 8,540 10,222 10,089 5,641 Gross Profit 3,174 5,214 6,705 7,791 7,951 Gross Profit 1,577 1,642 1,647 2,103 2,120 SG&A Expense SG&A Expense R&D Expense R&D Expense Dep. & Amort. 1,068 1,419 1,806 2,283 2,708 Dep. & Amort Other Oper. Exp Other Oper. Exp Operating Income 1,377 2,974 3,892 4,479 4,117 Operating Income ,142 1,076 Interest Expense (703) (1,427) (1,690) (1,807) (2,055) Interest Expense (221) (192) (206) (267) (337) Other Non Oper. Exp Other Non Oper. Exp EBT ex Unusuals 938 1,747 2,662 3,167 2,523 EBT ex Unusuals Total Unusual Exp. (128) (404) 776 (76) (1,751) Total Unusual Exp. (1) 7 12 (70) (258) Earnings Before Tax 810 1,343 3,438 3, Earnings Before Tax Income Tax Expense Income Tax Expense Net Income ,193 1, Net Income Earnings per Share $ Earnings per Share $3.35 $3.04 $2.35 $ Dividends per Share $1.05 $1.40 $1.60 $1.74 $1.61 Dividends per Share $2.37 $2.69 $2.89 $3.07 $3.16 Effective Tax Rate 44.57% 10.35% 21.58% 20.96% 73.06% Effective Tax Rate 1.49% 1.12% 1.33% 1.37% 0.69% Total Common Shares ,036 1,137 2,187 Total Common Shares Year end Stock Price $ $ $ $ $ Year end Stock Price $ $ $ $ $ Balance Sheet Highlights Balance Sheet Highlights Assets Assets Cash and Equivalents Cash and Equivalents Short Term Investments Short Term Investments Total Cash & ST Invest Total Cash & ST Invest Total Receivables 933 1,362 1,805 1,745 1,371 Total Receivables , Inventory Inventory Prepaid Expenses Prepaid Expenses Total Current Assets 1,663 3,674 3,868 3,752 2,824 Total Current Assets 1,306 1,892 1,583 1, Net PPE 17,926 30,996 35,847 38,564 40,547 Net PPE 5,704 7,144 9,102 11,536 12,257 Total Assets 30,717 68,245 75,185 83,049 84,104 Total Assets 8,947 10,959 12,863 14,600 14,928 Liabilities and Equity Liabilities and Equity Accounts Payable 728 1,248 1,676 1,588 1,324 Accounts Payable 1,049 1,134 1, Accrued Expenses Accrued Expenses Short Term Debt Short Term Debt , Total Current Liab. 4,529 5,228 6,075 6,362 4,065 Total Current Liab. 1,889 1,570 1,706 2,336 1,580 Long Term Debt 14,356 32,001 34,003 40,150 42,466 Long Term Debt 3,516 4,804 6,045 6,004 6,695 Total Liabilities 22,149 44,145 46,900 48,623 48,701 Total Liabilities 5,500 6,496 7,864 8,482 8,430 Preferred Equity Preferred Equity Common Stock & APIC 3,439 14,927 14,489 36,199 41,683 Common Stock & APIC 3,386 4,406 4,882 5,831 6,215 Retained Earnings (3) (943) (1,372) (2,106) (6,103) Retained Earnings Treasury Stock Treasury Stock Total Common Equity 3,321 13,866 13,093 34,076 35,119 Total Common Equity 3,334 4,306 4,824 5,739 6,102 Total Equity 8,568 24,100 28,285 34,426 35,403 Total Equity 3,447 4,464 4,999 6,119 6,497 Total Liab. and Equity 30,717 68,245 75,185 83,049 84,104 Total Liab. and Equity 8,947 10,959 12,863 14,600 14, Margins and Profitability KMI, Page 2 of 17 Copyright Robert A. Weigand, Ph.D., 2016

3 KMI OKS ONEOK Partners, L.P. Profit Margins Profit Margins Gross Profit Margin % 47.7% % Gross Profit Margin 13.9% 16.1% 13.9% 17.3% 27.3% Operating Profit Margin 17.3% 29.8% 27.7% 27.6% 28.6% Operating Profit Margin 8.3% 9.4% 7.5% 9.4% 13.9% Net Profit Margin 7.5% 3.2% 8.5% 6.3% 1.8% Net Profit Margin % 4.4% 4.6% 2.5% Free Cash Flow Margin N/A 110.8% 12.7% 6.6% 3.7% Free Cash Flow Margin N/A % 9.7% 3.2% Gross Profit Margin Operating Profit Margin Gross Profit Margin KMI OKS Gross Profit Margin Operating Profit Margin % % % Operating Profit Margin KMI OKS Net Profit Margin KMI OKS Free Cash Flow Margin KMI OKS Gross Profit Margin: Gross profit margin shows gross profit as a percentage of revenue. Kinder Morgan's gross profit is in an uptrend from 2013 to 2015, increasing from 47.7% to 55.2%. Despite this uptrend, KMI's gross profit is still below the industry average of 55.7% according to Yahoo Finance. OKS's Gross Margin is also uptrending from 2013 to 2015, increasing from 13.9% to 27.3%. The increase in KMI and OKS's gross profit margin in 2015 signals that revenues are growing slower than gross profit or equivalently Ggross profit is growing faster than revenues. KMI is outperforming OKS every year, indicating that a greater percentage of revenue is avaliable to flow toward KMI's bottom line profits, free cash flow that supports the firms intrinsic value, and back to investors in the form of dividends. Operating Profit Margin: Operating profit margin illustrates operating profit as a percentage of revenue. KMI's operating profit margin remains fairly constant from 2012 to 2015, over the course of these 4 years the profit margin only falls 1.2% from 29.8% to 28.6%. OKS's Operating Profit Margin is on an uptrend from 7.5% in 2013 to 13.9% in KMI is outperforming OKS every year. KMI's uptrend signals that there is more cash avaliable to flow toward bottom line profits, free cash flow that supports the firm's intrinsic value, and back to the investors in the form of dividends. Net Profit Margin: Net profit margin expresses net income as a percentage of total revenues. KMI shows a downward trend from 8.5% in 2013 to 1.8% in 2015, where revenues are growing faster than net income. OKS's Net Profit Margin shows a downtrend from 6.5% in 2012 to 4.4% in 2013, with a slight uptick to 4.6% in 2014, then continues its downtrend to 2.5% in KMI outpreforms OKS in every year except 2012 and Low profit margins indicate that neither KMI's nor OKS's profits are flowing to the bottom line effienctly. According to Morningstar "Results were driven by a decrease in CO2 segment and higher interest expense partially offset by higher earnings in natural gas and product pipeline segments." KMI's net income decrease in 2015 can be attributed to a increase in the effective tax rate due to the acquisition of EPC and unusual expenses (litigation expenses). Conclusion: Overall, KMI's gross profit margin and operating profit margin are in a recent uptrend, while KMI's net profit margin is in a significant downtrend. Indicating that KMI is not as efficient at making revenues flow to the bottom line. KMI's revenues are growing faster than their net profit margin as growth in expenses has outpaced revenue growth. KMI's low gross and operating margins indicate that a smaller precentage of revenue is available to flow toward bottom line profits, free cash flow that supports a firm's intrinsic value, and back to investors in the form of divdiends. KMI's net profit margin shrinks from 7.5% in 2011 to 1.8% in 2015, which shows that KMI's profits are not 1. Margins and Profitability KMI, Page 3 of 17 Copyright Robert A. Weigand, Ph.D., 2016

4 KMI OKS ONEOK Partners, L.P. Profitability Ratios Profitability Ratios Net Profit Margin 7.5% 3.2% 8.5% 6.3% 1.8% Net Profit Margin % 4.4% 4.6% 2.5% Total Asset Turnover Total Asset Turnover = Return on Assets 1.9% 0.5% 1.6% 1.2% 0.3% = Return on Assets 7.6% % 3.9% 1.3% Equity Multiplier Equity Multiplier = Return on Equity 6.9% 1.3% 4.2% % = Return on Equity 19.8% 14.8% 10.6% 9.3% 3. 8% 7% 6% 5% 4% 3% 2% 1% Return on Assets Return on Equity Total Asset Turnover KMI OKS 25% 2 15% 1 5% Return on Assets Return on Equity Equity Multiplier KMI OKS Return on Assets KMI OKS Return on Equity KMI OKS Total Asset Turnover: The total asset turnover is the percentage of revenue that is generated by total assets. Kinder Morgan is experiencing a downtrend from 2011 to 2012, while staying relatively constant from 2013 to ONEOK is in a downtrend from 2011 through 2015, and outperforming Kinder Morgan every year. The downtrend signals that Kinder Morgan is generating fewer revenues per dollar of assets compared to ONEOK. Return on Assets: Return on assets is net income as a percentage of assets. Kinder Morgan's ROA is in a downtrend from 1.6% in 2013 to 0.3 in 2015 due to a decrease in net profit margin and total asset turnover holding constant during this time. ONEOK's ROA shows a downtrend from 7.6% in 2011 to 3.9% in 2014, then decreasing more noticeably to 1.3% in While ONEOK is in a constant downtrend, they are still outperforming Kinder Morgan each year. ONEOK's performance above Kinder Morgan from 2012 to 2014, shows that ONEOK is generating more net income per dollar of assets. Return on Equity: Return on equity is net income as a percentage of shareholder's equity. Kinder Morgan's ROE is in a downtrend from 2013 to 2015 due to a decrease in net profit margin and the equity multiplier, while total asset turnover remains relatively constant. ONEOK's ROE shows a downtrend from 2011 through 2015 and outperforms Kinder Morgan every year. ONEOK's outperformance of Kinder Morgan every year from 2011 to 2015 illustrates that Kinder Morgan is expressing less dollars of profit relative to the capital contributions by shareholders than ONEOK every year. Conclusion: Overall, Kinder Morgan's return on assets and return on equity are in a downtrend from 2013 to 2015 due to a decrease in net income. With a decreasing net profit marign and a low total asset turnover, the decrease of ROA and ROE signals that KMI is generating less net income per dollar of assets and equity. 1. Margins and Profitability KMI, Page 4 of 17 Copyright Robert A. Weigand, Ph.D., 2016

5 KMI OKS ONEOK Partners, L.P. Multiples and Yields Multiples and Yields Price/Earnings Price/Earnings Price/Book Price/Book Price/Free Cash Flow N/A N/A N/A 45.2 N/A Price/Free Cash Flow N/A N/A N/A N/A 32.9 Earnings Yield 2.6% % 2.1% 0.8% Earnings Yield 5.8% 5.6% 4.5% 5.9% 2.4% Dividend Yield 3.3% % 4.1% 10.8% Dividend Yield 4.1% % 7.7% 10.5% Price/Earnings Price/Free Cash Flow Price to Earnings KMI OKS Price/Earnings Price/Free Cash Flow Earnings Yield Dividend Yield Earnings Yield KMI OKS Earnings Yield Dividend Yield 1.2 Price to Book KMI OKS 12. Dividend Yield KMI OKS 5 Price to Free Cash Flow KMI OKS Price to earnings ratio: The price to earnings ratio expresses the stock price as a multiple of its earnings over the past 12 trailing months. Kinder Morgan's P/E ratio is increasing, throughout all years, the P/E ratio is 38.3 in 2011 increasing to 129 in 2015, is outside the reasonable range of The rise in Kinder Morgan s P/E ratio is due to a decreasing stock price in 2015 and a even larger decline in earnings per share. This indicates potential concern for possible overvaluation. Earnings yield: The earnings yield, the reciprocal of its P/E ratio, expresses EPS as a percentage of the stock price. Kinder Morgan's earnings yield is in a downward trend from 2.6% in 2011 and dropping out at.8% in 2015 as the stock price grows faster than its earnings. Oneok's earnings yield is in a downward trend from 5.8% in 2011 to 2.4% in 2015 the stock price grows faster than earnings. Kinder Morgan and Oneok's lower earnings yield indicate that the market is pricing their stock more expensive relative to its earnings. Dividend yield: Dividend yield expresses the annual dividend per share as a percentage of the stock price. Kinder Morgan's increase in dividend yield from 2011 to 2015, shows that the market is pricing the stock cheaper relative to its dividend per share as DPS grows faster than the stock price. The sharp increase in Kinder Morgan s dividend yield in 2015 is due to a sharp decrease in stock price. Oneok's dividend yield is also in an uptrend from 2011 to 2015, with an aggressive uptick in 2015 to 10.5%. Both firms are in an uptrend from 2012 to 2015 were both firms surpass 1 which is significantly above our 2% benchmark for strong dividend payers. Conclusion: Kinder Morgan P/E ratio is above the reasonable range of were earnings decline faster that the stock price indicating concerns about a possible overvaluation. Kinder Morgan's dividend yield rises above 4.1% reaching a peak of 10.8% in 2015 which is well above our preference of 2% benchmark for strong dividend payers. 2. Relative Valuation and Debt KMI, Page 5 of 17 Copyright Robert A. Weigand, Ph.D., 2016

6 KMI OKS ONEOK Partners, L.P. Liquidity and Debt Liquidity and Debt Current Ratio Current Ratio Quick Ratio Quick Ratio Days Sales Outstanding Days Sales Outstanding Inventory Turnover Inventory Turnover Total Debt to Assets 48.9% 47.8% 46.5% 48.8% 50.5% Total Debt to Assets 39.3% 43.8% % 48.5% Long Term Debt to Equity 432.3% 230.8% 259.7% 117.8% 120.9% Long Term Debt to Equity 105.4% 111.6% 125.3% 104.6% 109.7% Times Interest Earned Times Interest Earned Current Ratio Quick Ratio Current Ratio KMI OKS Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Total Debt to Assets KMI OKS Days Sales Outstanding Inventory Turnover Total Debt to Assets Long-Term Debt to Equity Long-Term Debt to Equity KMI OKS Total Debt to Assets Long-Term Debt to Equity Current Ratio: The current ratio measures the firm s ability to meet short term obligations. Kinder Morgan current ratio has been increasing from 2011 to 2012 from.37 to.7 with a corresponding decrease from 2013 to 2014 from.64 to.59 with an increase in 2015 to.69. Oneok has been in an uptrend from 2011 to 2013, and has been higher than Kinder Morgan over this period. Both companies are below 1.0 from 2011 to 2015 meaning these companies might not be able to meet their short term obligations. Total Debt to Assets: Total debt to assets is the percentage of total debt to total assets. Kinder Morgan s total debt to assets have been decreasing from in 2012 to in 2015, having a higher ratio than Oneok until Kinder Morgan s high ratio expresses that Kinder Morgan is incurring more debt to finance to acquire assets. Conclusion: Both Kinder Morgan and Oneok are maintaining a current ratio below 1.0 which illustrates that both companies may not be able to meet their short term obligations. Kinder Morgan 's increasing total debt to assets can be attributed to their increase in debt to fund acquisitions. 2. Relative Valuation and Debt KMI, Page 6 of 17 Copyright Robert A. Weigand, Ph.D., 2016

7 KMI OKS ONEOK Partners, L.P. Total Invested Capital Total Invested Capital Total Cash and ST Investments Total Cash and ST Investments Receviables 933 1,362 1,805 1,745 1,371 + Receviables , Inventory Inventory Accounts Payable 728 1,248 1,676 1,588 1,324 Accounts Payable 1,049 1,134 1, Accrued Expenses Accrued Expenses = Net Oper. Working Capital = Net Oper. Working Capital (26) 76 + Net Property, Plant & Equip. 17,926 30,996 35,847 38,564 40,547 + Net Property, Plant & Equip. 5,704 7,144 9,102 11,536 12,257 = Total Invested Capital 17,980 31,694 36,526 39,001 40,647 = Total Invested Capital 5,777 7,637 9,196 11,510 12,333 Total Weighted Shares ,036 1,137 2,187 Total Weighted Shares = Total Invested Capital/Share $25.43 $34.94 $35.26 $34.30 $18.59 = Total Invested Capital/Share $28.35 $35.17 $40.93 $47.31 $46.14 Net Property, Plant & Equip. Total Invested Capital Net Property, Plant & Equip. Total Invested Capital $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Total Invested Capital per Share KMI OKS $50 $40 $30 $20 $10.00 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 KMI OKS ONEOK Partners, L.P. NOPAT and Free Cash Flow NOPAT and Free Cash Flow Operating Income (EBIT) 1,377 2,974 3,892 4,479 4,117 Operating Income (EBIT) ,142 1,076 (1 Effective Tax Rate) 44.6% 10.3% 21.6% % (1 Effective Tax Rate) 1.5% 1.1% 1.3% 1.4% 0.7% = Net Oper. Profit After Tax 763 2,666 3,052 3,540 1,109 = Net Oper. Profit After Tax ,127 1,068 Total Invested Capital N/A 13,714 4,832 2,475 1,646 Total Invested Capital N/A 1,860 1,559 2, = Free Cash Flow N/A (11,048) (1,780) 1,065 (537) = Free Cash Flow N/A (914) (682) (1,187) 245 NOPAT per Share $1.08 $2.94 $2.95 $ NOPAT per Share $4.55 $4.35 $3.90 $4.63 $4.00 Free Cash Flow per Share N/A ($12.18) ($1.72).94 (.25) Free Cash Flow per Share N/A ($4.21) ($3.04) ($4.88).92 Net Operating Profit After Tax Free Cash Flow NOPAT per Share KMI OKS Net Operating Profit After Tax Free Cash Flow $6,000 $4,000 $2,000 ($2,000) ($4,000) ($6,000) ($8,000) ($10,000) ($12,000) $5.00 $4.00 $3.00 $2.00 $ $1,500 $1,000 $500 ($500) ($1,000) ($1,500) Total invested capital: KMI's total invested capital is showing an uptrend from 2011 to KMI's total invested capital exceeds OKS's from 2013 to Kinder Morgan has had a substantial increase in Net PP&E from $17,926 to $40,547, while OKS s Net PP&E increased at a less significant rate from $5,704 to $12,257. NOPAT/share: KMI's NOPAT/share has been in a upward trend from $ to $ until 2015, where NOPAT deceases while the number of shares increases as well. OKS's NOPAT/share decreases from 2011 to 2013, increasing in 2014, and starting to decrease again in The increase in NOPAT for KMI in 2012 can be attributed to a decrease in their tax rate from 44.6% in 2011 to 10.3% in 2012 showing an increase in tax efficiency, but the effective tax rate increases again to 21.6% in 2013 and 73.1% in 2015, while OKS has significantly lower tax rates every year showing a tax advantage. FCF/Share: KMI's FCF/share is negative in 2012, 2013 and 2015 when the change in total invested capital is greater than NOPAT. OKS's free cash flow/share decreases in 2012 to 2014, and starts increasing again in KMI's negative free cash flow/share signals that there is less free NOPAT to pay out to investors since it has been spent on acquiring new assets, and these newly acquired have yet to generate substantial revenues, and EBIT which feeds into NOPAT and FCF more directly. 3. Value Creation and DCF Model KMI, Page 7 of 17 Copyright Robert A. Weigand, Ph.D., 2016

8 KMI OKS ONEOK Partners, L.P. Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted % Equity Capitalization $32, % 7.342% 3.19 Equity Capitalization $8, % 4.796% 2.525% + Total Debt $42, % % + Total Debt $7, % % + Preferred Stock Preferred Stock = Value of All Securities $75, = Value of All Securities $15, Effective Tax Rate 73.06% Alternative RF Rate: Effective Tax Rate 0.69% Alternative RF Rate: Risk Free Rate 1.742% 1.742% Risk Free Rate 1.742% 1.742% Beta (5 Yr) Alternative Beta: Beta (5 Yr) Alternative Beta: Market Risk Premium Market Risk Premium 7. CAPM Cost of Equity 7.342% CAPM Cost of Equity 4.796% Weighted Average Cost of Capital: 3.952% Weighted Average Cost of Capital: 4.876% 3.952% 3.952% 3.952% 3.952% 3.952% KMI OKS ONEOK Partners, L.P. ROIC, EVA and MVA ROIC, EVA and MVA Return on Invested Capital 4.2% 8.4% 8.4% 9.1% 2.7% Return on Invested Capital % 9.5% 9.8% 8.7% Economic Value Added 53 1,414 1,609 1, Economic Value Added Market Valued Added 19,423 18,178 24,203 14,030 2,489 Market Valued Added 8,434 7,417 7,005 3,903 1,951 EVA per Share.07 $1.56 $1.55 $1.76 (.23) EVA per Share $3.16 $2.64 $1.91 $2.32 $1.75 MVA per Share $27.47 $24 $23.36 $12.34 ($1.14) MVA per Share $41.38 $34.16 $31.18 $16.04 $7.30 2,500 2,000 1,500 1, ,000 Economic Value-Added Market Valued-Added 30,000 25,000 20,000 15,000 10,000 5, ,000 $3.50 $3.00 $2.50 $2.00 $1.50 $ EVA per Share KMI OKS Economic Value-Added Market Valued-Added 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, % 6% 4% 2% Return on Invested Capital Return on Equity Return on Invested Capital KMI OKS 25% 2 15% 1 5% Return on Invested Capital Return on Equity ROIC: Return on invested capital measures how much NOPAT a firm generates per dollar of invested capital. KMI experiences an upward trend in ROIC from 4.2% in 2011 to 9.1% in2014, but it decreases significantly to 2.7% in OKS's ROIC decreases from 16% in 2012 to 8.7% in 2014, OKS outperform KMI from 2011 to 2015 generating more NOPAT per dollar of total invested capital. KMI is experiencing a decrease in how much NOPAT has been generated per dollar of invested capital. KMI's ROIC did not beat the WACC in 2015 meaning KMI is not in a position to generate value. EVA/share: EVA/share measures how much economic value a firm has created on a year by year basis per share. KMI's EVA/share is in upward trend from 2011 to 2014, showing that NOPAT KMI generates is higher than the cost of capital, but decreasing significantly to $.23 in OKS's EVA per share is on a downward trend, signaling less economic profit is being created on a per share basis. To conclude, KMIs EVA decrease in 2015 expresses that total invested capital increased as well as an increase in the number of shares, less economic profit has been created. Conclusion: The Beta has been adjusted to.8 to stress out the model and allow for mean reversion. With a beta closer to the mean of.8, a WACC of 3.95%, an increase in total invested capital, and an increase in the number of share; EVA decreases significantly showing how much economic profit KMI destroyed in Value destruction is confirmed by the ROIC WACC spread where KMI's ROIC decrease to 2.7% below the 3.95% WACC. 3. Value Creation and DCF Model KMI, Page 8 of 17 Copyright Robert A. Weigand, Ph.D., 2016

9 Long Term Growth Rate: Long Term Growth Rate: KMI 1. OKS ONEOK Partners, L.P. Intrinsic Value Model Intrinsic Value Model PV of Future FCFs 27,514 17,553 16,467 18,183 18,365 PV of Future FCFs 1,834 2,838 3,659 5,024 5,024 + Value of Non Oper. Assets Value of Non Oper. Assets = Total Intrinsic Firm Value 27,103 16,839 15,869 17,868 18,136 = Total Intrinsic Firm Value 1,869 3,375 3,793 5,066 5,029 Total Debt 15,024 32,622 34,982 40,536 42,466 Total Debt 3,516 4,804 6,045 7,060 7,242 = Intrinsic Value of Equity 42,127 49,461 50,851 58,404 60,602 = Intrinsic Value of Equity 1,646 1,429 2,252 1,993 2,213 Total Weighted Shares ,036 1,137 2,187 Total Weighted Shares = Per Share Intrinsic Value $59.59 $54.53 $49.08 $51.37 $27.71 = Per Share Intrinsic Value $8.08 $6.58 $12 $8.19 $8.28 vs. Year End Stock Price $32.17 $35.33 $36.00 $42.31 $14.92 vs. Year End Stock Price $57.74 $53.99 $52.65 $39.63 $30.13 Over (Under) Valuation/Share $91.76 $89.86 $85.08 $93.68 $42.63 Over (Under) Valuation/Share $65.82 $60.57 $62.67 $47.82 $38.41 % Over (Under) Valued % 173.3% 182.4% 153.8% % Over (Under) Valued 814.9% 920.6% 625.3% 583.8% 464. $60 $40 $20 $20 $40 $60 $80 Year-End Stock Price Per Share Intrinsic Value $50 $40 $30 $20 $10 $10 MVA per Share KMI OKS $70 $60 $50 $40 $30 $20 $10 $10 $20 Year-End Stock Price Per Share Intrinsic Value $100 $80 $60 $40 $20 $ Over (Under) Valued % Over (Under) Valued 135% % % % % % 1 8% 6% 4% 2% Return on Invested Capital WACC $70 $60 $50 $40 $30 $20 $10 $ Over (Under) Valued % Over (Under) Valued MVA/share: MVA/share measures value creation over the entire life time of the firm. KMI's MVA/share is in a downward trend from $27.47 in 2011 to $1.14 in OKS is in a downward trend from $41.38 in 2011 to $7.3 in OKS has a higher MVA/share than KMI, expressing a higher value of capital contributions to the firm by shareholders. Both firms are in a downward trend showing how genuine value creation decreases on a per share basis from 2011 to ROIC vs. WACC: KMI's ROIC is on a decreasing trend which is closing the gap between the ROIC and WACC, that can be attributed to the increases in total invested capital. The diminishing gap between ROIC and WACC signals that the firm is decreasing its ability to generate economic profit on its investments where in 2015 the WACC is greater than the ROIC due to a lower NOPAT and higher total invested capital signaling value destruction. Conclusion: KMI's MVA per share decline expresses how genuine value creation is destroyed in The increased total invested capital, and the decrease NOPAT in 2015 caused a lower return on the invested capital that decreased the ROIC WACC spread showing a decrease in KMI's ability to generate economic profit. 3. Value Creation and DCF Model KMI, Page 9 of 17 Copyright Robert A. Weigand, Ph.D., 2016

10 KMI OKS ONEOK Partners, L.P. Piotroski Financial Fitness Scorecard Piotroski Financial Fitness Scorecard Positive Net Income Positive Net Income Positive Free Cash Flow Positive Free Cash Flow Growing ROA (% change NI > % change TA) Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) Increasing Liquidity (Current Ratio) % Change Shares Outstanding < % Change Shares Outstanding (Diluted) < Expanding Operating Margin Expanding Operating Margin Asset Turnover (% change sales > % change assets) Asset Turnover (% change sales > % change assets) Total Liabilities to Operating Cash Flow (EBIT) < Total Liabilities to Operating Cash Flow (EBIT) < Piotroski Score (max = 10) Piotroski Score (max = 10) KMI OKS ONEOK Partners, L.P. Altman Probability of Bankruptcy Z Score Altman Probability of Bankruptcy Z Score (Current Assets Current Liabilities)/Total Assets ## (Current Assets Current Liabilities)/Total Assets Retained Earnings/Total Assets ## Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets ## Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities ## Market Value Equity/Total Liabilities Sales/Total Assets ## Sales/Total Assets Altman Score Altman Score Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < Value Creation and DCF Model KMI, Page 10 of 17 Copyright Robert A. Weigand, Ph.D., 2016

11 31 Dec Dec Dec Dec Dec 15 KMI Energy Report Date: April 18, 2016 Historical Income Statement Drivers Average Forecasted Income Statement Drivers E 2017E 2018E 2019E 2020E Total Revenue 7,943 9,973 14,070 16,226 14,403 Total Revenue 14,619 14,985 15,284 15,513 15,669 % growth N/A 25.6% 41.1% 15.3% 11.2% 16. % growth 1.5% 2.5% % 1. Gross Profit 3,174 5,214 6,705 7,791 7,951 Gross Profit 7,310 7,417 7,489 7,524 7,521 Gross Margin (% of sales) % 47.7% % 48.6% Gross Margin (% of sales) % % 48. Operating Income (EBIT) 1,377 2,974 3,892 4,479 4,117 Operating Income (EBIT) 4,093 4,121 4,127 4,111 4,074 Operating Margin (% of sales) 17.3% 29.8% 27.7% 27.6% 28.6% 26.2% Operating Margin (% of sales) % % 26. Earnings Before Tax 810 1,343 3,438 3, Income Tax Expense Forecasted Effective Tax Rate Effective Tax Rate 44.6% 10.3% 21.6% % 34.1% Effective Tax Rate Adjustment Net Income ,193 1, Net Income 1,170 1,498 1,681 1,706 1,724 Net Margin (% of sales) 7.5% 3.2% 8.5% 6.3% 1.8% 5.4% Net Margin (% of sales) Total Common Shares ,036 1,137 2,187 Total Common Shares 2,143 2,111 2,090 2,080 2,069 % growth N/A 28.3% 14.2% 9.7% 92.3% 32.6% % growth % % 0.5% Earnings per Share $ Earnings per Share Dividends per Share $1.05 $1.40 $1.60 $1.74 $1.61 Dividends per Share $1.03 $1.05 % growth N/A 33.3% 14.3% 8.7% 7.8% 11.2% % growth Year end Stock Price $ $ $ $ $ Historical Balance Sheet Drivers Forecasted Balance Sheet Drivers 2016E 2017E 2018E 2019E 2020E Cash + ST Investments Cash + ST Investments % of sales 5.2% 7.2% 4.9% 2.8% 2.4% 4.5% % of sales Total Receivables 933 1,362 1,805 1,745 1,371 Total Receivables 1,711 1,753 1,788 1,815 1,833 % of sales 11.7% 13.7% 12.8% 10.8% 9.5% 11.7% % of sales Inventory Inventory % of sales 2.2% 3.8% 3.1% 2.8% 2.8% 2.9% % of sales Net PPE 17,926 30,996 35,847 38,564 40,547 Net PPE 40,933 41,207 41,267 41,111 40,738 % of sales 225.7% 310.8% 254.8% 237.7% 281.5% 262.1% % of sales Total Assets 30,717 68,245 75,185 83,049 84,104 Total Assets 85,521 86,910 87,884 88,427 88,528 % of sales 386.7% 684.3% 534.4% 511.8% 583.9% 540.2% % of sales Payables and Accruals 1,465 1,761 2,241 2,225 2,019 Payables and Accruals 2,332 2,390 2,438 2,475 2,499 % of sales 18.4% 17.7% 15.9% 13.7% % of sales ST Debt plus LT Debt 15,024 32,622 34,982 40,536 42,466 ST Debt plus LT Debt 43,126 44,054 44,783 45,299 45,596 % of sales 189.1% 327.1% 248.6% 249.8% 294.8% 261.9% % of sales Total Equity 8,568 24,100 28,285 34,426 35,403 Total Equity 35,086 34,464 33,625 32,578 31,337 % of sales 107.9% 241.7% % 245.8% 201.7% % of sales Total Revenue Growth: The S&P is projecting total revenue growth of 3.81% in 2016, 5.4% in 2017, and 4.21% in The model above takes a conservative approach with forecasting total revenue growth of 1.5% in 2016, and tapering down the long term perpetual growth rate to 1% which reflects a margin of safety. Gross Profit Margin: S&P analysts are predicting that the gross margin is going to decrease to 54.42%, but expect them to rebound to 55.44% in 2017, yet the forecast takes a conservative approach. The starting point of 5 incorporated a margin of safety, and is tapered down to 48%. EBIT: Analyst at S&P predicted 29.72% operating margin in 2016, taking a conservative stand point and margin of safety it steadily decreases from 28% in 2016 to 26% in E Tax rate: S&P CIQ estimate a 2 effective tax rate from 2016 to The forecast assumes a constant 2 tax rate from 2016 to Net Income: Analyst are forecasting an increase in net income (S&P Capital IQ) from 10.61% in 2016, 12.05% in 2017, and 13.75% in 2018; however, the model reflects a more conservative forecast and shows it increasing from 8% in 2016 to 11% in The forecasting reflects an upward trend. The decrease in net profit margin in 2015 was due to the one time increase in the effective tax rate from the EPC acquisition. Total Common Shares: Kinder Morgan's 10 k states that they are taking place in a repurchasing program, however there is no specified time frame for this but have been approved for $90 million to repurchase warrants. Due to the lack of a time frame the model reflects KMI slowly repurchasing common stock, and decreasing over the years. Dividend/share: There is a margin of safety and the model is conservative due to their past history of paying dividends. Analyst's reports states that KMI will cut their dividend in 2016 then increase the dividend incrementally over the following years. S&P is forecasting DPS of 0.50 in 2016, 0.51 in 2017, 0.63 in 2018, 1.11 in 2019, and in 1.93 by Cash: Due to a repurchasing program and reduction of debt forecasted, Cash remains constant at 3% from 2016 to Net PPE: Due to acquisitions and asset improvement efforts it is forecasted that net PPE will increase in 2016 above their historical average, and it is tapered down due to the assumption that the level of intentsity of investing in new infrastructure is reduced. Total Assets: Due to increasing Net PPE in 2016 forecasted total assets are expected to increase above the historical average. Starting above their historical average of 540.2% total assets is forecasted to be 585% 2016 decreasing to 565% in Debt & Equity: The forecast shows total debt of 295% and total equity of 24 and both are tapered down to 291% and 20 respectively due to KMI intentions of paying off debt and the repurchase program in the next 5 years. 4. Forecasting and Valuation KMI, Page 11 of 17 Copyright Robert A. Weigand, Ph.D., 2016

12 Total Revenue Operating Income (EBIT) Earnings per Share Dividends per Share Gross Profit Margin Operating Profit Margin $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2, E 2017E 2018E 2019E 2020E $2.00 $1.50 $ E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance Total Invested Capital Total Invested Capital 2016E 2017E 2018E 2019E 2020E Cash and ST Investments Cash and ST Investments Receviables 933 1,362 1,805 1,745 1,371 + Receviables 1,711 1,753 1,788 1,815 1,833 + Inventory Inventory Payables and Accruals 1,465 1,761 2,241 2,225 2,019 Payables and Accruals 2,332 2,390 2,438 2,475 2,499 = Net Oper. Working Capital = Net Oper. Working Capital Net Property, Plant & Equip. 17,926 30,996 35,847 38,564 40,547 + Net Property, Plant & Equip. 40,933 41,207 41,267 41,111 40,738 = Total Invested Capital 17,980 31,694 36,526 39,001 40,647 = Total Invested Capital 41,178 41,458 41,523 41,370 41,001 Total Common Shares ,036 1,137 2,187 Total Common Shares 2,143 2,111 2,090 2,080 2,069 = Total Invested Capital/Share $25.43 $34.94 $35.26 $34.30 $18.59 = Total Invested Capital/Share $19.21 $19.64 $19.87 $19.89 $ % 1 8% 6% 4% 2% Net Profit Margin Effective Tax Rate (right axis) 2016E 2017E 2018E 2019E 2020E $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Total Invested Capital Net Fixed Assets 2016E 2017E 2018E 2019E 2020E $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Total Invested Capital Net Operating Working Capital 2016E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance NOPAT and Free Cash Flow NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E Operating Income (EBIT) 1,377 2,974 3,892 4,479 4,117 Operating Income (EBIT) 4,093 4,121 4,127 4,111 4,074 (1 Effective Tax Rate) 44.6% 10.3% 21.6% % (1 Effective Tax Rate) = Net Oper. Profit After Tax 763 2,666 3,052 3,540 1,109 = Net Oper. Profit After Tax 3,275 3,297 3,301 3,289 3,259 Total Invested Capital N/A 13,714 4,832 2,475 1,646 Total Invested Capital (153) (370) = Free Cash Flow N/A (11,048) (1,780) 1,065 (537) = Free Cash Flow 2,744 3,016 3,236 3,442 3,629 NOPAT per Share $1.08 $2.94 $2.95 $ NOPAT per Share $1.53 $1.56 $1.58 $1.58 $1.58 Free Cash Flow per Share N/A ($12.18) ($1.72).94 (.25) Free Cash Flow per Share $1.28 $1.43 $1.55 $1.66 $1.75 FCF/Share: Kinder Morgan FCF shows an upward trend from 2016 to 2020 due to smaller changes in total invested capital that are smaller than NOPAT. There is more FCF that supports the firms intrinsic value. ROIC: The forecasted ROIC greater than the WACC of 5.148% illustrates that KMI is still able to create value, but the forecasted ROIC is decreasing over time signaling a relatively small decrease in their ability to generate profit on investments. 4. Forecasting and Valuation KMI, Page 12 of 17 Copyright Robert A. Weigand, Ph.D., 2016

13 Cost of Capital 2015 Weight % Cost Weighted % Dividend Discount Valuation Model Equity Capitalization $32, % 6.642% 2.886% + Total Debt $42, % % Year 2016E 2017E 2018E 2019E 2020E = Value of All Securities $75, Dividend Growth Rates Expected Future Dividends $1.03 $1.05 Effective Tax Rate 2 Alternative RF Rate: Risk Free Rate 1.742% 1.742% PV Dividends 1 4 $2.19 Dividend Yield 2.7% Beta (5 Yr) Alternative Beta: PV Perpetual Div. $17.52 Market Risk Premium Intrinsic Value $19.72 If Purchased For: $18.09 CAPM Cost of Equity 6.642% Current Price $18.09 Expected Return = 9. Weighted Average Cost of Capital: 5.148% 5.148% 5.148% 5.148% 5.148% 5.148% ($18.09) % % % $ % $ % Historical Performance Forecasted Performance ROIC, EVA and MVA ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E Return on Invested Capital 4.2% 8.4% 8.4% 9.1% 2.7% Return on Invested Capital % 7.9% Economic Value Added 162 1,035 1,172 1, Economic Value Added 1,155 1,162 1,164 1,159 1,148 Market Valued Added 14,176 7,944 9,011 13,680 2,773 Market Valued Added 3,686 7,248 8,524 10,071 11,896 EVA per Share (.23) $1.14 $1.13 $1.35 (.45) EVA per Share MVA per Share $25 $8.76 $8.70 $12.03 ($1.27) MVA per Share $1.72 $3.43 $4.08 $4.84 $5.75 $6,000 $4,000 $2,000 ($2,000) ($4,000) ($6,000) ($8,000) ($10,000) ($12,000) NOPAT Free Cash Flow 2016E 2017E 2018E 2019E 2020E $4 $2 ($2) ($4) ($6) ($8) ($10) ($12) ($14) NOPAT per Share Free Cash Flow per Share 2016E 2017E 2018E 2019E 2020E 2,000 1,500 1, ,000 1,500 EVA MVA (right axis) 2016E 2017E 2018E 2019E 2020E 20,000 15,000 10,000 5, ,000 Perpetual Growth Rate: 1. Historical Performance Forecasted Performance DCF Intrinsic Value Model DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E PV of Future FCFs 55,856 69,780 75,152 77,956 82,506 PV of Future FCFs 84,009 85,318 86,474 87,484 88,358 + Cash and ST Investments Cash and ST Investments = Total Intrinsic Firm Value 56,270 70,503 75,837 78,414 82,847 = Total Intrinsic Firm Value 84,448 85,767 86,932 87,949 88,828 Total Debt 15,024 32,622 34,982 40,536 42,466 Total Debt 43,126 44,054 44,783 45,299 45,596 = Intrinsic Value of Equity 41,246 37,881 40,855 37,878 40,381 = Intrinsic Value of Equity 41,322 41,713 42,149 42,650 43,233 Total Common Shares ,036 1,137 2,187 Total Common Shares 2,143 2,111 2,090 2,080 2,069 = Per Share Intrinsic Value $58.34 $41.76 $39.44 $33.31 $18.46 = Per Share Intrinsic Value $19.28 $19.76 $20.17 $20.51 $20.89 vs. Year End Stock Price $32.17 $35.33 $36.00 $42.31 $14.92 vs. Most Recent Stock Price $18.09 Over (Under) Valuation/Share ($26.17) ($6.43) ($3.44) $9.00 ($3.54) Over (Under) Valuation/Share ($1.19) % Over (Under) Valued 44.9% 15.4% 8.7% % % Over (Under) Valued 6.2% EVA/Share: EVA per share is increasing from 2015 to 2016, where from 2017 to 2020 it remains stable based on the forecast. EVA future constant trend is showing that the cost of capital and the NOPAT the firm generates are projected to remain stable. Intrinsic Value: Intrinsic value over the forecasted period appears to be undervalued from 2015 to The beta has been adjusted to.7 to stress the model and allow for mean reversion. MVA/Share: MVA per share increases to $1,72 in 2016 expressing a increase in the value of capital contributions to the firm by shareholders. Genuine value creation increases in the forecasted model from $1.72 in 2016 to $5.75 in Conclusion: KMI's MVA per share increase expresses how genuine value creation increases from 2016 to With Total Invested Capital slowing down, ROIC shows a small decrease of.01% in 2020 due to NOPAT growing slower than total invested capital. KMI forecasted ROIC WACC spread remains stable from 2016 to 2020 showing an improvement in their ability to generate profit on its 4. Forecasting and Valuation KMI, Page 13 of 17 Copyright Robert A. Weigand, Ph.D., 2016

14 ROIC WACC Year-End Stock Price Per Share Intrinsic Value $ Over (Under) Valued % Over (Under) Valued 1 8% 6% 4% 2% 2016E 2017E 2018E 2019E 2020E $70 $60 $50 $40 $30 $20 $ E 2017E 2018E 2019E 2020E $15 $10 $5 $5 $10 $15 $20 $25 $ E Historical Performance Forecasted Performance Relative Valuation Relative Valuation 2016E 2017E 2018E 2019E 2020E Price to Earnings Price to Earnings Price to Free Cash Flow N/A Price to Free Cash Flow Price to Sales Price to Sales Price to Book Price to Book Earnings Yield 2.6% % 2.1% 0.8% Earnings Yield % Dividend Yield 3.3% % 4.1% 10.8% Dividend Yield 2.7% 2.6% Price to Earnings Price to Free Cash Flow Price to Sales Price to Book (right axis) Earnings Yield Dividend Yield E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E P/E ratio: KMI's 2016 P/E ratio is above the reasonable range of 12 to 18, and stays above the reasonable range from 2017 to KMI's forecasted P/E can be a warning sign of volatility when there is no faster expected future growth for KMI. Dividend yield: KMI's dividend yield decreases in 2016 (still above 2%) and starts increasing from 2017 to 2020 remaining above the 2% which is good based on our preference for strong dividend payers where the forecast shows a dividend yield of 5% in 2019 and Forecasting and Valuation KMI, Page 14 of 17 Copyright Robert A. Weigand, Ph.D., 2016