# Kinder Morgan Inc. (NYSE:KMI)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Kinder Morgan Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 6.17%
01 FCFF0 3,793
1 FCFF1 3,761  = 3,793  × (1 + -0.85%) 3,542
2 FCFF2 3,742  = 3,761  × (1 + -0.49%) 3,320
3 FCFF3 3,737  = 3,742  × (1 + -0.13%) 3,123
4 FCFF4 3,746  = 3,737  × (1 + 0.23%) 2,949
5 FCFF5 3,768  = 3,746  × (1 + 0.60%) 2,794
5 Terminal value (TV5) 68,035  = 3,768  × (1 + 0.60%) ÷ (6.17%0.60%) 50,440
Intrinsic value of Kinder Morgan Inc.’s capital 66,167
Less: Mandatory Convertible Preferred Stock (fair value) —
Less: Debt (fair value) 38,016
Intrinsic value of Kinder Morgan Inc.’s common stock 28,151

Intrinsic value of Kinder Morgan Inc.’s common stock (per share) \$12.43
Current share price \$13.45

Based on: 10-K (filing date: 2020-02-12).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Weighted Average Cost of Capital (WACC)

Kinder Morgan Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 30,465  0.44 10.10%
Mandatory Convertible Preferred Stock (fair value) —  0.00 0.00%
Debt (fair value) 38,016  0.56 3.01% = 5.27% × (1 – 42.80%)

Based on: 10-K (filing date: 2020-02-12).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,265,063,459 × \$13.45 = \$30,465,103,523.55

Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (29.30% + 23.40% + 32.30% + 56.10% + 72.90%) ÷ 5 = 42.80%

WACC = 6.17%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Kinder Morgan Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest, net 1,801  1,917  1,832  1,806  2,051
Net income attributable to Kinder Morgan, Inc. 2,190  1,609  183  708  253

Effective income tax rate (EITR)1 29.30% 23.40% 32.30% 56.10% 72.90%

Interest, net, after tax2 1,273  1,468  1,240  793  556
Add: Preferred stock dividends —  128  156  156  26
Add: Common stock dividends 2,163  1,618  1,120  1,118  4,224
Interest expense (after tax) and dividends 3,436  3,214  2,516  2,067  4,806

EBIT(1 – EITR)3 3,463  3,077  1,423  1,501  809

Current portion of debt 2,477  3,388  2,828  2,696  821
Long-term debt, excluding current portion 31,915  33,936  35,015  37,354  42,406
Total Kinder Morgan, Inc.’s stockholders’ equity 33,742  33,678  33,636  34,431  35,119
Total capital 68,134  71,002  71,479  74,481  78,346
Financial Ratios
Retention rate (RR)4 0.01 -0.04 -0.77 -0.38 -4.94
Return on invested capital (ROIC)5 5.08% 4.33% 1.99% 2.02% 1.03%
Averages
RR -0.30
ROIC 2.89%

FCFF growth rate (g)6 -0.85%

Based on: 10-K (filing date: 2020-02-12), 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-16).

2019 Calculations

2 Interest, net, after tax = Interest, net × (1 – EITR)
= 1,801 × (1 – 29.30%) = 1,273

3 EBIT(1 – EITR) = Net income attributable to Kinder Morgan, Inc. + Interest, net, after tax
= 2,190 + 1,273 = 3,463

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,4633,436] ÷ 3,463 = 0.01

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,463 ÷ 68,134 = 5.08%

6 g = RR × ROIC
= -0.30 × 2.89% = -0.85%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (68,481 × 6.17%3,793) ÷ (68,481 + 3,793) = 0.60%

where:
Total capital, fair value0 = current fair value of Kinder Morgan Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Kinder Morgan Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Kinder Morgan Inc.’s capital

#### FCFF growth rate (g) forecast

Kinder Morgan Inc., H-model

Year Value gt
1 g1 -0.85%
2 g2 -0.49%
3 g3 -0.13%
4 g4 0.23%
5 and thereafter g5 0.60%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -0.85% + (0.60%-0.85%) × (2 – 1) ÷ (5 – 1) = -0.49%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -0.85% + (0.60%-0.85%) × (3 – 1) ÷ (5 – 1) = -0.13%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -0.85% + (0.60%-0.85%) × (4 – 1) ÷ (5 – 1) = 0.23%