Kinder Morgan, Inc. (KMI) Earnings Call Transcript & Summary

All right. Good morning, everyone. We got -- kicking off here with Kinder Morgan. We have EVP and Director -- sorry, Chief Strategy Officer, Dax Sanders. So floor is yours, sir.

Great. Thank you. All right, Spiro. Well, thanks a lot. Thanks for having us and thank all of you for being here. Again, I'm Dax Sanders, Executive Vice President and Chief Strategy Officer. Just 30 seconds on me. I've been at Kinder Morgan for -- it will be 20 years this year. Have done several different things. I look over corporate M&A, strategy, JV management. I do a decent bit of Investor Relations as well and a couple of other things here and there. But I'm just going to walk you through the presentation, give you a couple of updates on things. Will be some basics and some things that are -- that we covered before but just to -- kind of the state of the company. We got the disclosure there. So starting with this slide. This is really just kind of an overview of who we are, who Kinder Morgan is, one of the largest energy infrastructure companies in North America. We've got the largest natural gas network in North America, 70,000 miles of natural gas pipelines. About 659 Bcf of working storage capacity, which is the largest storage footprint in North America. And we move about 40% of the U.S. natural gas for consumption. And with our network, we've got a largely portfolio of pipelines that are franchise-type pipelines that are not just supply push but are demand pull, critical moat franchise-type pipelines. Tennessee Gas Pipeline is probably the best example of that. Multiple supply connection points, multiple delivery points, real good demand pull and, again, sort of a franchise business, not just a sort of point-to-point basis pipeline that goes and comes with the basis. Largest independent transporter of refined products. We've got -- we move about 1.7 million barrels a day of refined products, about 6,800 miles of refined products pipelines and 3,100 miles of crude pipes. On the terminals front, we've got 100 -- we're the largest independent terminal operator in North America, 147 terminals and 16 Jones Act vessels. Also subsumed within that, we've got -- one of our major assets and hubs is the Houston Ship Channel position. We've got -- one of the major themes we've got are tied around refined products exports, and we've got 11 docks and 40 million barrels of storage there. So refined products exports is a story that's been pretty topical for us and been a big part of our business and we think will be going forward. And the largest transporter of CO2, about 1.2 Bcf a day of CO2 and that's our tertiary recovery business. Moving to the second slide. This is really just sort of a summary about the way we think about ourselves as a core energy infrastructure holding, roughly a $50 billion market cap. And obviously, with the volatility we've had in the market, all of this is sort of changing by the hour, but about a $50 billion market cap. One of the largest -- 10 largest companies in the S&P 500, really large insider ownership. I think we like to think of ourselves, well, not just like to think of, we are a company that thinks like principles. We think about the company every day. We're not just agents but highly incented principles, 15% of the company owned by management. Based on the current dividend, which is $1, the yield is about 5%. We have -- consistent with the guidance we gave several years ago, we will be increasing the dividend up to $1.25 on an annualized basis, which gets you closer to 6% on a yield basis. And after that, our dividend policy will be discussed by the Board. But we've given guidance up to the $1.25. A $2 billion share buyback program in place. So we put in place a couple of years ago and we've used about $525 million of that since December of 2017. So we've got a decent bit of firepower under that, and I'll talk about capacity here in just a second on the next slide. Looking at some of the key milestones we got to in 2019. We sold, as part of the last saga in the Trans Mountain -- the last piece in the Trans Mountain saga, we sold all of KML as well as the Cochin pipeline for about $2.5 billion. We created about $1.2 billion of balance sheet flexibility by beating our leverage target. Our leverage target is still is about 4.5x. We're a bit under that. We're about 4.3x, which creates about $1.2 billion of balance sheet flexibility that we can use opportunistically. We put a couple of major projects in service. We put GCX, which is the first trans-Texas, Permian egress gas pipeline, 2 Bcf a day in service in September of last year as well as the Elba project. You'll recall that's the 10-train LNG liquefaction project that we're building for Shell in Elba Island. There are 10 trains, 80% of the EBITDA, we've got 4 trains in place right now. The fifth train, commissioning of that is imminent, will be any minute, and the rest of the trains will be in place by midyear. 80% of the EBITDA though comes with and started coming with the commissioning of the first train, which we got done in 2019. Looking at CapEx that we were planning on CO2, we eliminated a good chunk of it with looking through the lens of the response we were getting on some of the pilot projects, Tall Cotton, as well as through the lens of oil prices. And so the CO2 -- well, the whole business with CO2, in particular, is a business that we are incredibly capital disciplined about. We're not about maintaining flat production. We're about allocating every marginal dollar to the highest return and making sure it gets the right return. We increased the dividend 25% year-over-year, again, part and parcel with the dividend guidance that we'd given that got us up to $1 and will get us up to $1.25. And then on the ESG front, we've made a lot of progress on the ESG front. ESG is something that's obviously become highly topical. I'm sure it is with all of you, with your investors. And it's something that we put a lot of energy into. The biggest place where we have, given that we're the largest natural gas transporter in the U.S., is with methane emissions. And we spend a lot of time trying to think about, reduce our methane emissions. We were one of the founders of a group called ONE Future. And we have, in terms of natural gas storage and transportation, a methane emission rate of 0.02%. We've put a lot of thought into seeing where we can do this because it -- not only is it something that's become very topical but it actually makes a lot of business sense as well. This slide has got just a summary. If you've got the book, this has got a slide of our budget for 2020, just a summary. I'm really going to skip over this slide but happy to answer any questions about it. Looking to 2020 from a cash flow -- from an excess cash flow perspective. We've got -- our budget contemplates $2.7 billion of excess cash flow, which is effectively $5.1 billion of DCF less $2.4 billion of discretionary capital, which gets you to $2.7 billion of excess on the 2.2 billion shares at $1.25 a share, that's $2.7 billion of dividends paid, again taking into account the 25% increase, which gets you to -- we still got the residual $1.2 billion of balance sheet capacity that I mentioned above and beyond our leverage target. We expect to end, again 2020 at 4.3x. Again, our target is still 4.5 -- around 4.5x from a long-term perspective. And so we've got incremental capacity, the $1.2 billion of incremental capacity, as we look at our 2020 budget, for share buybacks, capital projects or retain balance sheet capacity. And what we have stuck to and retained our internal hurdle rate for new projects of 15% unlevered after tax. And we still -- we've said consistently, we still are of the view that we can deploy $2 billion to $3 billion a year of capital at those return thresholds. And I think based on those returns, investing capital at those returns is our highest priority. So that's a thing that we will prioritize as those opportunities continue to present themselves. Looking at this slide. What this slide really does, and I'm just going to touch on it quickly. This slide really is just sort of the sources and uses. And what this does is injects cash flow from operations as a source, which is exactly operating cash -- cash flow from operations from the cash flow statement. So this really just sort of shows how we get the sources of cash, how we use them. It shows a true GAAP cash flow number as opposed to distributable cash flow and really sort of balances everything. I'm not going to spend a lot more time on that but it's there for reference. Looking at the next slide. This is a slide that really kind of speaks to the cash flows we have. Obviously, credit risk has become very topical over time. If you look to the left, you see roughly $7.8 billion of segment EBITDA. Roughly 64% are take-or-pay, which is you pay no matter what. About 27% is fee-based, which -- and a lot of people talk about fee-based cash flows, which would mean a whole lot of different things. Those are earnings that have some element of volumetric exposure. Our Products Pipelines group is a perfect example, Policy Act of '92 pipes, which are a predicate of how many barrels. There's no long-term contracts here, it's a predicate of how many barrels people ship, but those are largely moat-type businesses. That's about 27%. And then you get to about 5% are what we'd call hedge volumes and have some element of commodity exposure but they are hedged and then 4% are other. But I think the overall takeaway there is the overwhelming majority are take-or-pay and even larger plug above that are fee-based type cash flows of the earnings that aren't. Moving to the right, and this kind of speaks to credit quality, 78% of our customers are -- or 78% of our EBITDA contribution comes from customers that are investment-grade. About 10% are what we would call or what we would consider to be junk-rated or are junk-rated. And then 12% are not rated. Plus, and this is incredibly important, 71% of the net revenue comes from end users of the products we handle. So there are people that actually need the product. They're not supply push-type situations from people with marginal credit. And I think this gets to the franchise we have. In areas where we have -- if you look back to the bankruptcies throughout 2016, the wave of bankruptcies that happened in which I can't remember the exact number, something like over 100, the total hit to us from a cash flow -- recurring cash flow perspective from the E&P side. Coal was a little bit heavier but it was about $10 million. So we have lots of situations where again, going back to the moat-type business that something like a Tennessee pipeline is, that's a business where the capacity is needed by end users, to the extent that we had a bankruptcy and somebody has capacity on that and it gets rejected. In most cases, it's easily remarketable, we can go back to the market and remarket it. And it's capacity that's really needed by end users. And in most cases, it's not above market capacity. In other situations, we have substantial credit support. In the Ruby Pipeline, which is an example of a type of pipeline that is sort of a basis pipeline that has contracts that are above what the basis suggests. There was a bankruptcy on that pipeline, but we had -- and the contract was rejected but we had an LC on that, and we were able to pull the LC and it basically paid for almost the entire remaining tenor of the contract. So -- and credit is something that we put an enormous amount of time. On our weekly management meeting, we go through every single credit -- significant amount of credit exposure. We review that. We look at credit developments. There's an AR meeting every month. The senior management looks at every single receivable and makes sure that nothing gets behind. So the overall point is, I think, credit is obviously very topical. We obviously have exposure to some people, but credit is something that's not, we believe, a big risk to us and the risk that we do have. We spend an enormous amount of time thinking through. I'm going to skip over a couple of slides here that really are sort of macro, to talk about some of the micro stuff we've got here. So this slide really kind of gets to our current backlog which I'll talk about in a second, $3.6 billion, $2.4 billion of that is from natural gas projects. The other $1.2 billion, you've got about $200 million each from products and terminals, the balance from CO2. But the largest portion -- gas is our largest business but it also is the largest source of future investments. And we believe that U.S. demand certainly is going to continue, but the export story is still there. And look, and I know that there's been -- there have been some issues lately with -- certainly, spot pricing for LNG has gotten a lot of attention, and some cargo is not getting lifted has gotten attention, but the long-term macro aspect of it, we believe, is still going to be pretty beneficial to our assets. 83% of forecasted demand growth from '19 to 2030 is in the Gulf Coast. And demand growth in terms of Bcf a day 15.2 in LNG exports, 2.7 Bcf of Mexico exports and then 2.4 Bcf of incremental industrial demand. And the thing about, obviously, demand and lower commodity environments, particularly for gas, obviously, are not extraordinarily friendly to suppliers and producers but they are friendly to consumers and ultimate net user. So that's a story that we think is going to continue to drive positives for us. Looking at Page 14. This is really a summary of our backlog that I was just talking about. Again, $3.6 billion, $2.4 billion from natural gas, just under $1 billion from -- and I'll give you an update on the Permian takeaway pipelines here in just a second. But $2.4 billion from natural gas, $1.2 billion from the others gets you to $3.6 billion. And we published -- we've talked about the valuation on the $2.4 billion, which about 2/3 of that is at a 5.5 -- roughly a 5.5x EBITDA multiple, which is consistent with where we've invested capital over time. We look at where we've invested capital over time. It's somewhere in the roughly sort of 6x range. And that's why when we talk about the $1.2 billion of additional capacity and the 15% and the ability to actually find projects, the absolute best place for us to operate is with respect to projects that we can find that operate off of our network to where we have a competitive advantage based on the pipe and steel on the ground because in a lot of ways, infrastructure is a scale game. Let me flip to -- I'm going to go to Page 16 here to give you an update just kind of on Permian. GCX, obviously, there are 2 Permian pipes, 2 Permian gas egress pipes that we have. The first one, Gulf Coast Express, we put into service in September of '19, as I mentioned. That was a big achievement for 2019. Permian Highway is the pipe that is under construction right now and it is under construction right now. We still expect -- the guidance we've given is that it will be in service in early 2021. As we stand here today, that is -- we're reaffirming that, that is the case. We have started construction on it. You saw the court decision that came in the middle of February that allowed us to start tree clearing. We had a certain amount of tree clearing that we had to get done by March 1 to -- and this is all getting within a window to accommodate the habitat of the golden-cheeked warbler. We got all that we needed to get done. We basically got every bit of it done except for about a 3-mile stretch, which is easily doable for us to make up in the fall when the clearing season resumes. We've got all the permits that we need. We've got all the land. Again, construction is underway. There is, I think you all know there is an injunction hearing. The plaintiffs in the case petitioned for an injunction. That hearing is going on right now in Austin, Texas. We still -- we feel very confident about our position and our situation, and we are confident the pipeline is proceeding as expected and will be in service in early '21. Talking about the next pipeline. And obviously, the next overall pipeline is Whistler, which has been FID'd. That's not our pipeline but that's in process. P3, which we call Permian Pass, P3 would be the fourth pipeline and our third pipeline. Conversations with producers on that continue. We don't have anybody signed up yet. The market suggests that, that pipe should be needed in, call it, roughly 2023. We're not going to build it like we're not going to build anything until we get good solid long-term contracts, minimum 10-year take-or-pay contracts. The path of that pipeline is a little bit different. It goes a little bit further north and is more tied to some LNG projects. But that, we could see an FID to the extent that producers and obviously, we're in an environment where people -- producers have to be very cognizant of their balance sheets and what they commit to over a long period of time. But that could be something that potentially gets FID'd this year, assuming the market comes together. But again, we'll continue to have conversations with producers. And if it comes together, it does. If it doesn't, it doesn't. That's the state of our pipe Permian egress. Getting just a little bit more on sort of the overall macro. U.S. LNG exports, again, we think -- our view is they're going to continue to be very important -- an important driver of our growth. You look at again, 70,000 miles of natural gas pipeline network. It's right in the heart of our intrastate market. Our intrastate market is where the Permian egress pipelines are tying in, both Agua Dulce for Gulf Coast Express, Katy for Permian Highway and Agua Dulce for Whistler. You've got the sort of the next wave of projects that are being improved. The Cheniere Train 6, you've got Golden Pass, the Venture Global project, all of those projects are -- we believe our network is very well positioned to be -- to provide very good service to those projects. Just being mindful of time here. I think that's really all I've got in terms of prepared comments. I think we can go ahead and do some questions now.

Yes. So thanks, Dax. So I'll kick it off here. Just thinking about the landscape and really what's changed, it feels like forever since your Analyst Day at this point. I can't believe it's only been a little over a month. And of course, lot's changed since then. So just wondering if you can give us a sense if you guys have already started to augment your strategy before, as you said after the year? And if you've seen any sort of demand or supply responses so far to kind of what's been happening vis-à-vis coronavirus and just the market sell-off?

Yes, that's a good question. I mean, obviously, it's incredibly early. I mean we're sort of a week into -- kind of 1.5 week half into the macro response on -- from a coronavirus perspective. I mean, in terms of like real-time bleeding stuff, we haven't yet. In terms of -- we're obviously -- we, in large part, are a service provider to our customers, be they existing customers, be they future customers for anchoring additional capacity and we're in constant contact with them. Obviously, the broader equity -- the broader risk markets have been volatile and energy markets within the broader risk markets have been especially volatile, even more volatile, which there's no doubt, I'm sure our customers and people are looking at. And so that certainly could affect conversations. But just to reiterate, so many of the customers we have, which I talked about earlier, are demand pull, they're LDCs, they are people that are ultimate consumers and users of gas. They're tied to people heating their homes, people using power, things like that. And so in terms of what we do on an everyday daily basis, we haven't changed much. But you're right, it seems like an eternity since the Analyst Day.

Fair, fair. Just on the buyback, you brought the capital allocation, the flexibility this year. I think we come into the year largely assuming that buyback would not be a big part of that allocation up until now actually. Obviously, KMI, like every other equity, got sort of dragged down in this. Just wondering if that screen is a little bit better for you guys these days?

Well, certainly, there's no question that lower screen is better than higher. But look, we've not given a target as to whether we're going to be a buyer, and we've not updated as to whether we've been a buyer or not. And again, we've not given a target as to where we're going to be a buyer. I think we've said we're going to be opportunistic. We've got the flexibility to do it. I think that again, we are of the view that to the extent that we can deploy capital at 15% after-tax -- unlevered after-tax returns on projects, that's our preference. And we're going to do that. But I think the most important thing is we are -- we have that capacity. We sort of control our destiny. We control how it gets used. And we've got a lot of options, and we're going to use it in the most opportunistic way that we can.

Yes. Last one for me and we'll open up to the crowd. Just on Permian Highway. When do you think you'll be in a position to say it's going to be January versus March? Does everything basically have to go perfectly from here to January? Just any sense you can give us around that.

Yes. No, look, I know the market. I know it's -- we certainly dealt with that with GCX. I mean we had people flying drones over it every day to determine whether it was going to be early, on an hourly basis, or not. I think right now, I mean, there are -- I mean, I think right now, we're going to stick to the sort of early 2021. Clearly, as it gets closer and we get a better idea about things, I mean, I think we're -- we obviously are cognizant that the market wants to know, and we will update to the extent we have confidence in the ability to sort of do that.

Got it. Anyone from the crowd?

You mentioned in your prepared remarks, ESG, and then obviously, the slide here talks about $2 billion to $3 billion of growth CapEx per year. At a high level, how do you and the company think about the potential whereby new pipeline might not actually be able to be built, and therefore, your pipe and ground becomes more valuable, and potentially -- and this might be the wrong terminology, but you might have more pricing power with your end customer base?

Yes. We think about that all the time. Look, there is no question that over time, building pipeline, building any sort of infrastructure has gotten more difficult. That applies everywhere. Now you can still build pipelines. We absolutely can build pipelines. And we think that, that's something that differentiates us from some of our competition. And I think we think our customers notice that, that we put our head down, and even in difficult areas, we'll do what we need to do to get it done and get something in place, which we think is a pretty solid competitive advantage for us when we're trying to sign up new pipes. Certainly, pipes are -- but they are difficult, and you're exactly right. After we own a particular project, get through talking about the difficulties and grimacing about the difficulties that we just went through, we reflect on what that means in that the pipeline infrastructure that we have in the ground is that much more valuable. And so we assess it all the time. Every project is different, every area is different. We think about -- we are much more engaged. We have much more of a sort of a leading community engagement type effort now that we do to make sure that we're engaged in the community where we're looking to build something, that we know the concerns of the community, that we're having conversations, that we're getting in front of them and we're being proactive, not necessarily reactive. But look, I mean, we -- your point is right. We do have a very valuable network in the ground right now and for the foreseeable future, it is -- those assets are doing what they're doing. But certainly, it's not lost on us that an element of embedded optionality is that in another environment, that right-of-way could be incredibly valuable.

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We've said specifically for the foreseeable future. So -- well, I mean, we don't have a time line on it. And look, it's -- certainly, it's subject to change. I mean, as we look out, I would say as we look out over, call it, 2 to 3 years, that's kind of -- I mean, there's obviously -- we could say 10 years but nobody can look out that far. But if you just take, again, [ 2.3 ] right now, you look at the backlog we have, you look at and you sort of extrapolate the conversations we're having with customers, again, I mean, we can't say with 100% certainty but -- and again, that is with an internal hurdle rate of 15% unlevered after tax. I think -- I mean, if we found ourselves in a -- not to say that we can't create substantial value for the company even with a low hurdle rate.

Anyone else? Maybe Dax, maybe just one more for me. Just thinking about ESG and just longer term. How do you think about your prospects for transitioning, not so much out of energy, but getting more and more into infrastructure, maybe working further downstream with utilities to do things a little bit different outside of just moving the energy?

Yes. No, no, good question. I think -- so just a couple of things. Generally speaking on ESG, we're trying to be a leader in ESG. Again specifically with the effect of methane emissions, we've done an ESG report last couple of years. We've got -- it's both SASB and TCFD compliant. We've got our own section on the website that puts all of our ESG stuff out there. We focused intently on methane emissions. And our -- and there's a lot of low-hanging fruit here. And there's a lot of things you can do that are not just geared towards looking good from an environmental perspective, but it actually makes a lot of sort of business sense. Now one of the things about ESG, at least, we always say to make -- that you've got to keep in mind is the G is just important as everything else, and being a good steward of capital is incredibly important, and we're never going to go out and deploy capital in a 3% return just to sort of check a box. We've spent a lot of time and continue to spend time looking at renewables investments and thinking about it. But based on what we've seen, fully contracted pipelines look cheap compared to fully contracted renewable portfolios. But we've certainly looked at things like procuring more renewable power on some of our assets, doing things like drag-reducing agents and variable frequency drive type apparatuses that use less power. And we've also thought about -- we've looked at our portfolio and said, do we have some unique aspects that we can add that would allow us to develop some sort of a renewables platform? And so it's something we look at and we think about all the time. But the most important thing is we've not found something where there is low-hanging fruit and where we can get a really good attractive return on capital. But it's something that we do think about and spend a lot of time on.

Got it. All right. Appreciate it. Please join me in thanking KMI. Thanks, guys.

Thank you.