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

Hello, and welcome to the Annual Meeting of Stockholders of Kinder Morgan, Inc. Please note that today's meeting is being recorded. During the meeting, we will have a question-and-answer session. If you signed into the meeting as a stockholder with a controlled number, you can submit a written question now or at any time during the meeting by clicking on the Message icon at the top of your screen. Please note that your registered name will be announced along with your question during the Q&A session following the formal portion of the meeting. Guests will not be able to submit questions. Please also note that those stockholders who signed in with a control number and guests are in a listen-only mode. If you experience technical difficulties during the meeting, please click on the Support link on the broadcast screen. It is now my pleasure to turn today's meeting over to Richard D. Kinder, Executive Chairman of Kinder Morgan, Inc. Mr. Kinder, the floor is yours.

Thank you. Good morning, everyone. I'd like to welcome all of you to the Kinder Morgan, Inc. 2021 Annual Meeting of Stockholders. Due to the public health impact of the COVID-19 pandemic and out of a concern for the health and well-being of our stockholders and our employees, we're hosting today's meeting through a virtual online platform. On the line with me today are members of our senior management and Board of Directors as well as Robert Keehan of PricewaterhouseCoopers. At this time, I call the meeting to order. The agenda and rules of conduct for the meeting have been posted on the virtual platform. Let me review with you what we are going to accomplish today. First, we will conduct the formal portion of the meeting and vote on the 4 proposals on the agenda. The polls will close as soon as I finish reading the 4 proposals, and I will announce the preliminary voting results at that time. Accordingly, if you have joined the meeting as a stockholder using the control number you received from Computershare and have not yet cast your vote, please do so at this time. After the formal portion of the meeting, I will give a brief presentation about the current state of the company, and then we will hold a Q&A session before adjourning the meeting. If you joined the meeting as a stockholder using a control number, you have the ability to submit written questions at any time during the meeting by clicking on the Message icon at the top of your screen, typing your question in the Ask A Question field and clicking submit. If you joined the meeting as a guest, you will not be able to submit questions. Questions should be properly focused solely on the official business of the company and should not be used to present economic, political or other views that are not directly related to the business of the meeting. We are limiting questions to 1 for stockholder plus 1 follow-up question for stockholder. We have allotted up to 20 minutes for the question-and-answer period, which should be sufficient based on our historical experience. KMI's Investor Relations staff will follow-up after the meeting with any stockholders whose questions were not answered during the allotted period. I would now like to introduce Adam Forman, Vice President and Secretary of Kinder Morgan. I will preside over the meeting, and I ask Mr. Forman to serve as the secretary of the meeting. I appoint David Cruz of Computershare, who is present online, as inspector of election. The inspector of election has agreed to serve and has signed the oath of that office. The oath will be included with the minutes of this meeting. Computershare has provided a list of the company's registered stockholders as of the close of business on the record date, which was March 15, 2021, and this list is available on the virtual platform for inspection during the meeting by those who have joined the meeting as stockholders. Computershare has delivered an affidavit of mailing, certifying that the mailing of the notice was made on April 1, 2021, to the stockholders of record at the close of the business on the record date. A copy of the affidavit will be included with the meetings -- minutes of this meeting. The inspector of election has signed a certificate of quorum, which certifies that a quorum of the stockholders of the company is present or represented by proxy at the meeting. The certificate will also be included with the minutes of this meeting. The first item on the agenda is a proposal to elect the 15 nominated directors to hold office for a 1-year term in accordance with our certificate of incorporation and bylaws. As indicated in the proxy statement, the Board of Directors recommends that you vote in favor of the election of each of the director nominees. The second item on the agenda is a proposal to approve the Kinder Morgan, Inc. 2021 amended and restated stock incentive plan. As indicated in the proxy statement, the Board of Directors recommends that you vote in favor of this proposal. The third item on the agenda is a proposal to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2021. As indicated in the proxy statement, the Board of Directors recommends that you vote in favor of this proposal. The fourth item on the agenda is a proposal to approve, on an advisory basis, the compensation of our named executive officers. As indicated in the proxy statement, the Board of Directors recommends that you vote in favor of this proposal. That concludes the presentation of proposals to be voted on. The polls are now closed for voting. The inspector of election has provided the preliminary voting results electronically and has confirmed the following: first, each of the 15 nominated directors has been elected by the affirmative votes of shares representing a majority of the votes cast; second, the proposal to approve our 2021 amended and restated stock incentive plan has been adopted by the affirmative votes of shares representing a majority of the votes cast; third, the proposal will ratify the selection of PricewaterhouseCoopers LLP as our registered public accounting firm for 2021 has been adopted by the affirmative votes of shares representing a majority of the votes cast; and fourth, the proposal to approve, on an advisory basis, the compensation of our named executive officers has been adopted by the affirmative votes of shares representing a majority of the votes cast. This concludes the formal portion of the meeting, and I will now give a brief presentation and then answer any questions that may be submitted by stockholders. Let me first turn to Slide 3 of the presentation and talk a bit about our strategy, which is really pretty simple, is to maximize the value of our assets on behalf of our shareholders. As indicated on that slide, we feel very fortunate to have stable fee-based assets. We think we are an important part of the core energy infrastructure of America. We are a safe and efficient operator. We have multiyear contracts on most of our pipeline and terminal capacity, and 90% of our cash flows are based on take-or-pay or fee-based arrangements. As we move forward, we're committed to invest in low-carbon future. We've recently announced the formation of an Energy Transition Ventures Group. We have a backlog of $1.4 billion, and 60% of that is allocated to natural gas projects. We've allocated 70% of our 2020 expansion CapEx to natural gas and LNG projects. And we've invested in biodiesel, ethanol and renewable diesel projects. It's important to recognize we believe in our financials flexibility. We expect to end the year at a 3.9x to 4.0x expected net debt-to-adjusted EBITDA. Our long-term target remains a bit higher than that at about 4.5x. We have a low-cost of capital, we have a solid BBB credit rating and we have ample liquidity. I always like to stress the disciplined capital allocation that we employ at Kinder Morgan. We use conservative assumptions. We face high-return thresholds for ourselves. And we, most importantly, probably are self-funding 100% of our CapEx and dividends and have done that for the last 5 years. All of this relates to our goal of enhancing shareholder value. We do that by maintaining a strong balance sheet, by investing in attractive projects that deliver returns in the future, by dividend growth. And we've shown that by increasing our dividend over the last few years, every year, and by opportunistic share repurchases. Turning to Slide 4. You can see the footprint that we have across America, which, as I said earlier, we believe, is core to the energy infrastructure of this country. We are the largest natural gas transmission network in this country. We have 70,000 miles of natural gas pipelines. We have over 650 Bcf of working storage capacity, which is extremely important, as was shown in the recent storm here in Texas. We're the largest independent transporter of refined products. We move about 1.7 million barrels a day of refined products. We're the largest independent terminal operator, and we're the largest CO2 transporter. And as you can see, our pipelines and our terminals criss-cross America. Turning to Slide 5 and looking at relative stock performance. Since the beginning of the very turbulent year of 2020, as you can see, we've performed pretty much in line with our peer group, but we've underperformed the S&P500. Even though our stock has been up over 30% year-to-date, we're still trading at a discount to the general market. And we view that as a situation where we are underpriced compared to what we believe our stock is really worth. Turning to Page 6. We had an original budget, and we updated that 2021 budget to reflect our -- primarily our experience during the February winter storm in Texas and elsewhere. Our updated 2021 budget estimates that we will have income -- net income of $2.7 billion to $2.9 billion, that we will have adjusted EBITDA of $7.6 billion to $7.7 billion, which is an increase of $0.8 billion to $0.9 billion from our original budget. And what we measure ourselves on primarily our distributable cash flow, we now expect to be $5.1 billion to $5.3 billion, which is an increase of -- from $700 million to $900 million. We'll be spending discretionary CapEx of around $800 million, and our increased dividend per share for this year is $1.08. As I mentioned earlier, we expect our year-end net debt-to-adjusted EBITDA to be in the range of 3.9 to 4x. Very importantly, the outlined portion of that Slide 6 indicates that we will generate this year $1.9 billion to $2.1 billion of distributable cash flow in excess of all the discretionary CapEx and all the dividends that we will pay during the year. That's what's known, in our view, as a well-covered dividend. Turning to Slide 7. As you can see, we have self-funded our CapEx and our dividend since 2016. And during that time, we paid down over $12 billion in debt. That's a significant reduction in our debt over that period of time. It's come from sale of some assets, but we've also generated $1.9 billion of free cash flow after dividends over the past 5 years. Again, this fits with our conservative approach to managing our assets and our cash flow. If you turn to Slide 8, I don't think I need to tell anybody that looking backward at 2020, it was a remarkable year in energy as it was a remarkable year for our economy in general and tragic in many ways for the country as a whole. Globally, we estimate that energy demand declined by about 5%; natural gas demand, which generates the bulk of our revenue and cash flow, dropped by about 3%; with oil demand contracting 8% with great impact on aviation fuel, as you could imagine, there's less people traveled by air; coal demand declined 7%; and energy-related CO2 emissions, as a result of all this, fell by 7%. In the U.S., it's a little different. Our natural gas consumption declined only 2%; upstream spending on U.S. shale is notable to state declined by about 50%. But I think the main takeaway in our field from 2020 is that despite all these severe disruptions, the critical nature of energy moderated the overall demand impact of this massive recession and massive issues that we had as a result of COVID during 2020. Turning to Slide 9. If you look at how Kinder Morgan weathered the COVID challenges in 2020, we think we did so while improving shareholder value. And again, we're committed to being disciplined stewards of the capital that we generate. We reduced our discretionary capital compared with the budget in 2020 by 30%, spending about $700 million. Thanks to Steve Kean and the team, we saved an operating cost and sustaining capital almost $200 million. We improved our distributable cash flow after discretionary CapEx by $200 million. We reduced our debt by almost $1 billion. And we paid out $2.4 billion to our shareholders in dividends, which was a 9% increase over 2019. Even though we paid out a larger amount to our shareholders, we still had 1.9x coverage of our dividend with our distributable cash flow. It's also important to note that during the pandemic we also successfully completed a major new pipeline project called the Permian Highway Pipeline, and we kept our critical infrastructure running during the whole period of time. Now if you turn to Slide 10, this is the backlog of our capital projects as of the end of the first quarter of 2021, and you can see that we're primarily focused on contracted natural gas opportunities. I don't think I have to tell anybody listening to this call that natural gas has created a tremendous improvement in emissions from power generation and other sources through its use in replacing coal and higher emitting fossil fuels during the last several years. And we think that will be a continued trend and the natural gas has a major role to play in our energy transition, both in the United States and abroad. If you turn to Slide 11, I mentioned earlier that we had formed an Energy Transition Ventures Group. This group will evaluate commercial opportunities that are emerging from the low-carbon energy transition. Now I want to emphasize that this is still the early days of this effort, but we're already evaluating opportunities. And these are opportunities that are outside of our existing asset base. With regard to those that are inside our existing base, the business segments will continue to pursue those opportunities. We think that most attractive opportunities will likely be synergistic with our existing infrastructure and our expertise. And they range from renewable natural gas, renewable diesel, carbon capture, utilization and storage; longer term, some opportunities for hydrogen, which, of course, can be moved to at least a certain extent through natural gas pipelines; and then there are potential opportunities in the area of renewable power and gas and electric transmission. We think we have a good team headed by Jesse Arenivas and Anthony Ashley, leading this Energy Transition Group, and we think that this will result in opportunities for us in the coming months and years. Finally, on Slide 12, I would just sum up what we've tried to say and say repeatedly on our analyst calls and in meetings with investors. We think that Kinder Morgan is a compelling investment opportunity. Why? First of all, we have stable cash flows with large percentage of take-or-pay or hedged earnings. We have a very healthy current yield, 6%. That's one of the top 10 dividend yields in the S&P500. We are funding our dividends and CapEx with operating cash. We've been doing that since 2016. We have authorized an additional $1.4 billion of repurchase of shares still remaining. And I think importantly, I always like to invest alongside people who have a stake in the game, and I will remind you again that we have a highly aligned management, which owns about 13% of the company. So we believe we are positioned for the energy future with a vast network of critical assets and a low-carbon focus. And with that, I'll turn -- we'll enter the question-and-answer session of the meeting. And I'd like to introduce Peter Staples, Director of Investor Relations, who will read aloud the stockholder questions that have been submitted, if any. Pete?

Good morning. There have been no questions asked.

Well, that makes it very easy then to conclude our question-and-answer session. We encourage stockholders who have questions to contact us through our Investor Relations page on our website. Since there is no additional business that may properly be brought before the meeting, I declare that the meeting is adjourned. Thank you, and good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.