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

Hi, everyone, and thank you for joining us. I'm Jean Ann Salisbury, the natural gas and midstream analyst at Bernstein. And I'm lucky enough to be joined by Steve Kean, the CEO of Kinder Morgan. Today, we're going to have to speak for about 5 to 10 minutes about the company, and then it will be open discussion. And I would just like to draw everyone's attention to the Pigeonhole link where you can vote on questions, add questions. So please feel free to join the conversation that way. And I'll turn it over to you, Steve.

All right. Thank you, Jean Ann. So Peter, if you go to Page 3. So we announced yesterday an important acquisition, $1.25 billion of a Northeast transportation and storage asset, Stagecoach, fits in very nicely with our existing TGP, Tennessee Gas Pipeline Asset. Serving a part of the country where there's not a lot of new infrastructure being added and serving a part of the market that I think is increasingly important, and that's at the very body to see responsive storage. And that's going to be a theme that you're going to hear on a handful of slides that go through. Increasingly as we rely more on renewables and the power generation stack. And increasingly, as there's weather volatility and other things, storage is going to be valuable. And we picked up a very nice storage asset that's nicely integrated into our existing asset holdings. So very happy about this acquisition. About a 10x multiple of 2020 EBITDA, we see that getting to high single digits or getting under 10x, when we take into account our synergies, which we have a very good line of sight on. So very good asset, happy to pick it up. Next page, this is the overall picture. And if you can recall in the previous page, Peter, if you point to kind of where it is on the TGP system map there, it's some in New York state on the New York Pennsylvania border, right in the heart of a constrained area on our system, and again, very valuable to enhancing our flexibility on the network. But overall, as a company, we're the largest natural gas transportation and storage company. And we serve every major base in every major market, and including serving the export outlets across the Gulf Coast and into Mexico. We're the largest independent transporter of refined products, largest independent terminal operator. And increasingly, what we're working on in those businesses, in addition to continuing to serve the need for midstream services for gasoline, diesel and jet fuel is also pointing our attention to additional renewable liquid fuels. We already handle ethanol and biodiesel today. We handle renewable diesel in a very small quantity today. We're looking to add to that capability. And then finally, CO2 transport -- transporter and the use of CO2 and our enhanced oil recovery business. It's only about 7% of our segment EBDA now. But it's also a nice leg in to carbon capture sequestration -- carbon capture and sequestration. We do the transport part of that. We do the sequestration part of that and our enhanced oil recovery operations. We'll talk briefly about energy transition Ventures group that we've set up that is working on the capture component of that. Okay, moving on, we believe we're a core holding and e-portfolio, significant market capitalization, one of the 10 largest energy companies, strong management alignment, with a strong ownership percentage management in the Board, a little under 6% current dividend yield and a share buyback program. So in addition to being aligned with investors, I think we deploy our capital in a very disciplined way, both for expansions as well as returning excess to our shareholders. So we updated our budget. You'll see on the next page, we're showing increase that's primarily related to winter storm urine, which affected all of our systems, but especially concentrated in our natural gas business unit and also in our CO2 business, where we're a significant power consumer in Texas, and we were able to sell that power back into the grid. So if you flip to the next page, Peter, again, this is a place where highly responsive storage revealed its value. It revealed itself when we had brown house in California, it revealed itself in the Polar vortexes in the Northeast that we had a few years back. It's revealing itself in Texas. Again, as we rely increasingly on renewables and the intermittent resources in the power stack, as we continue to see volatility in demand. Responsive storage assets and the deliverability that we can sell to our customers through the combination of storage and transport are going to be increasingly valued. We have a great position in Texas. With high deliverability storage, including salt dome, multiple turn storage service. The Stagecoach asset is also a multiple turn storage asset. It's not just a seasonal summer winter spread asset. And again, we think that continues to be increasing in value. All right. Next page, overall, our strategy we focus on core energy infrastructure. We contract for that on a fee base. So we reduce our exposure to commodity prices. We typically contract on a take-or-pay basis, which means we're not exposed to volumetric fluctuations as well or at least less so. We get our money for the space that our customers reserve. We are transitioning for those developments in a low-carbon future. I think natural gas needs to be distinguished as a hydrocarbon. It has a long, long-term role to play along with the other commodities, particularly in export markets. We've done a lot of work on our balance sheet to get to a BBB credit rating. We've reduced our debt balance by $12 billion over the last 5 years. We have a long-term target of around 4.5x ample liquidity. And then we invest in a very disciplined way on good returning projects with a good safety margin above our cost of capital. And then we enhance shareholder value by keeping that strong balance sheet by investing well and by returning value to our shareholders. The next couple of pages just highlight the security of the cash flows. And this one, you could see how much is only 4% is -- or 3% is other. Everything else is take-or-pay, fee-based or hedged. And the next page shows the credit quality and the lineup of our customers, which are mostly end users who need our services, rely on our services. So customer mix and the high-quality credit contribute to securing our cash flows. Skipping ahead to 13. So we did form this energy transition Ventures group. It's led by Jussi era Nevis, who runs our CO2 business, too. And Anthony Ashley, who is to be our Treasurer, who's now really taking the lead full-time on this with a small team that we put together. And you can see from left to right, sort of the timing of the opportunities that we see developing here. So I think the takeaway message from all this, what we do today and how we do it, it's going to be valuable for a very long time to come. But we are also gradually turning the ship, if you will, to pick up those opportunities in the energy transition world that fit with our asset footprint, are in adjacent businesses that we understand and without relaxing our return criteria. So what we see in our in our base business, again, natural gas is the big story here. We see 29% growth over the period. 2019 to 30% and then to 40%. And a lot of that is driven by global export demand. What we did in the U.S. in the natural gas business as we took a lot of CO2 out of the air by displacing displacing coal with natural gas in the power stack. There's no reason why we can't do that with U.S. natural gas really around the world. And so this is based on Wood Mackenzie. It's not just our analysis as well. On the next page, just to point out that we have good growth in natural gas and a lot of that growth, we believe, is going to be concentrated in 2 if you will, more permitting friendly states, Texas and Louisiana, 80% of the forecasted demand growth, which, again, is heavily tilted toward exports serving markets around the world. It's going to take place in Texas and Louisiana. And our network of assets are especially well positioned for that. And then the last page, I won't dwell on. Page 27 is just the overall value proposition that we see. From our business and with the set of assets that we have. And I'll stop there, Jean Ann, and we can go to questions.

Sounds good. I have some here. And then if we get some in Pigeonhole, I'll give it to those as well. So if we could just start on a couple about your recent deal announcement, can you talk about, more specifically, the synergies that you see between Stagecoach and your existing assets? I thought that because everything was regulated, it's a little bit harder to get synergies, but if you could let us know.

Sure. Yes. So it's regulated on the transmission side, but the storage is market-based rates, and that's a big piece of the picture here. But I'll give you some examples. We get some cost synergies here. A straightforward example of that is these assets are kind of controlled in the field, if you will, and we'll bring that control to our central control center. And so we have some headcount savings and some cost related synergies associated with that. On the commercial side, I'll give you a couple of examples. So this set of assets today is transacting in the market. One of the things they do in their self-storage space is they have to go out and hedge the late season withdrawal capability, okay? So just in case, they're late in the season, inventories are low and the customer is calling, right? When you combine our 2 portfolios here with TGP and the existing Stagecoach assets, we can avoid that cost. So that's a very straightforward kind of clear line of sight synergy that I think that we can expand on or that we can capture today and then expand from there. The other one, if you look at it the other way. So the Tennessee gas system today offers some very -- this is a constrained part of the system, some very high-value capacity that's required on a peak season deliverability. And some of that value is restricted or diminished because of constraints on the TGP system. What this allows us to do is get around those constraints. So those are 2 things where the 2 assets in combination of the portfolio is put together unlocks synergies for us. And then we can build from there. I think we have not really counted really any value in here for escalating value of storage, which I think will be a thing, right? But it's not priced into here. And so I think that's the opportunity for some additional synergies even beyond what we've identified.

Makes sense. And should investors read this as interest to expand further in the Northeast? Or was this more just a one-off that came across your eye?

Yes. This is less about the Northeast than it is about investing in flexible assets, responsive storage assets that are integrated with our existing footprint. That's really what drove it, not a motivation to get deeper into the Northeast. We're in that market. We like that market. We're happy to serve it, but this was driven by those 2 considerations rather than geography.

Makes sense. And then I have some kind of large buckets, ESG questions, some base business questions and then some thoughts on kind of the midstream industry overall, and I'll kind of pull in questions from Pigeonhole as well. But on the ESG questions, there's been a large focus on reducing methane emissions in the U.S. KMI has already notably reduced your missions over the past decade. Can you talk about what kind of modifications or CapEx would be required from here to reduce them further? If it occurs mostly in GMP or interest rates and whether there be a mechanism for Kinder Morgan to get paid for further reductions in the event that it does get mandated?

Okay. Yes. So we have captured -- we've been at this since the '90s. It's part of the EPA Star program, and a lot of that was economically driven. The margin on our transmission is maybe it's $0.10 to $0.30 or something with with gas prices running 10x to 30x that, right? So we get paid to move it, not to lose it. And so finding ways to avoid leakage and fugitive emissions on our system has always been an important part of just running our business and running our assets well. And as you see on the chart here, we've we've eliminated emissions that would have otherwise occurred but for those investments and for those opportunities. It is the case that we've captured a lot of low-hanging fruit on transmission, but there is some more there are some investments in valves on compressor stations and things like that, that may make some sense. There's some new technology that might make some sense to deploy on some new assets. The other source is, frankly, something we don't have much control over, and that's a regulatory item, which is part of our pipeline integrity program is both in line inspections, which we believe give a more efficacious way of determining the integrity of our pipelines, rather than a more blunt instrument of doing hydro test. When you do a hydro test, which is required in certain instances, in the regulations today and in the mega rule that FIMSA pass, you have to evacuate the line. Now we put portable compression out there to try to pull as much away from the area that we're evacuating as we can. But those emissions from the blowdown of the pipe, when we're getting ready to do a cut out or inspection, that's an area that is a pretty significant additional benefit that we could get if we could avoid that. So we -- obviously, we've talked to the regulators about that. We'd like maybe the environmental regulators should be a little focused on it, too, so that we can have a more broader discussion about it. There is some opportunity on the G&P side as well because most of our effort has been focused on trans -- transmission and storage. And so there is some additional work that we can make. But we've been making progress on this for a very long time. As you can see here, we joined us one future, which has the objective of getting across the value chain, less than 1% fugitive emissions. The allocation for transportation and storage is 0.3, and we're running at 1/10 of that. And we beat that objective 7 years early. And to your question about monetization of this, we have done a couple of deals now with responsibly sourced gas. So these are gas utilities who are looking to buy and transport and store low methane emissions gas we did one, it's been announced on Colorado Springs utilities. We have another one that will hopefully be announced shortly. And the idea there is you find a producer with low emissions completion techniques and low emissions operations, teaming up with our transportation and get it delivered all the way to the end user with less than 1% fugitive methane emissions along the way. And I think that's going to be an important contributing factor for our LDC customers. People who are in the gas business, serving a pretty sticky end-use load there. And so we're hoping to see that get more attention. We're not getting paid any extra for that. It's really about something we already do. May be able to convert deals from regulated rates to negotiated rates, but that's where we are right now.

Makes sense. Great. As Lindon Solar continues to gain share in the power stack at the expense of coal, how do you see Kinder Morgan's roll in gasify reliability changing? Do you think that this increasing 1 solar could actually lead to new pipeline and storage needs in metropolitan areas? Or do you think it will be more of a contract mechanism difference?

Yes. So first of all, like in a place like California, we have been for a year or 2 now, marketing our service to the utilities and the gas and power utilities there as a deliverability service, meaning that we care about -- care less about how many molecules you move through our pipe and more about what you're willing to pay to have the ability to call on it when it's required. And that demand on peak deliverability is demonstrably increasing as renewables have increased. And so it does create opportunity. It's a nice synergistic opportunity with those jurisdictions and those companies that want to have additional renewable generation. That's an important part of what we can contribute to the overall energy transition is our ability to backstop. Storage assets, gas storage is cheaper and longer duration than batteries and by a lot. And that is going to be important for the long term, whether some batteries get deployed or not that's going to be important to have that kind of in size and for duration responsiveness to increase demand for that capacity. So yes, it could lead to additional enhancements to the assets and maybe a reallocation on how the business is getting done to more of the flexible services. And so we're working on those kinds of things. But enhancing storage capabilities, enhancing the deliverability of assets on the pipeline side. We already do what packing we can do, packing and drafting into the line. If we can enhance that, I think we can get value for it.

Makes sense. Cool. And I had a question about the CCS value chain, and it looks like a couple of up here on as well. So I think just broadly, if you could kind of talk about the CCS value chain, which part is more difficult technologically? And which parts Kinder Morgan would have experience and sort of an edge in?

Sure. So I think we've got a slide that Peter can share here. There is some that's economic today so if you look -- the Economic Today, it's kind of the left-hand of the bar chart there, this is the [ 45Q ] tax credits, which just got finalized in January of this year. Now it's a little bit -- I want to say it's $35 a ton for the for enhanced oil recovery, which is what we primarily do -- which is what we do with the CO2. But so where this opportunity is available today is along our existing CO2 network, which is thick wall pipe, high deliverability, ties right into enhanced oil recovery operations. And with the tax credits is economic today for certain uses like ethanol facilities where the flu stream has rich CO2 content coming out of it, gas processing facilities, where the CO2 stream, again, is rich and currently vented. And so capturing that and then compressing it up and moving it into the pipe, those things are economic. From our perspective, the bigger longer-term though opportunity is that it's hard to see how climate objectives are met without pretty widespread carbon capture and sequestration. And so we think we've got the expertise on the pipeline side of it, expertise on the geological side of it in terms of making it go in the ground and stay in the ground. But there are some barriers, right? I think it is -- you can't just convert existing pipe infrastructure. You really do need to move this stuff in liquid form, which means high-pressure, very high-pressure pipe. If you think about gas and liquids pipelines running at at 800 to 1,000 psi, call it, there's various newer pipelines at thousand 440 or something like that, or about that. But you need to move the CO2 and liquid format, call it 2,000 psi. You can't just simply retrofit or you just can't simply introduce the CO2 at that kind of pressure in the existing network. So there are some obstacles here, which means that I think, additional incentives or whatever, are going to be required to make that more viable. So you think about doing that in an industrial area like the Houston Ship channel, which is not far from exhausted oil reservoirs, for example. That makes sense, but it's going to require, I think, some additional subsidies because you've got to build new pipe, you don't just use the existing network and you need some subsidies to make that capture and all of that work. So I think a big opportunity, but still some more work to do on the policy front to make it sizable.

Makes sense. And then I've gotten this question a couple of times today, I think, from your client meetings, and then it's sort of on Pigeonhole as well. But is it right to think that the near-term opportunity for Kinder Morgan is kind of taking CO2 from Permian processing plants? And then you could kind of put that into your existing system? And I guess, basically back out the CO2 that you're bringing down? Is that the way to think about it?

Yes, or used spare capacity in the pipe to accommodate it, right? But yes, that's the right way to think about it. On the existing footprint connecting sources that are adjacent. And that lets us use our pipe that can accommodate high pressure. It lets us use our existing enhanced oil recovery operation. There is one other thing that I should have mentioned. So there is a permitting process to get a field or a geological reservoir approved. That's a long process right now. We're not talking about barriers. That's a long process. I think in Texas, the recent legislation may help that get overseen in Texas at the Railroad Commission as opposed to the EPA. And I think also the EPA because of the need to do capture and sequestration has some pretty powerful incentives, and I think the administration is very likely to find a way to shorten up that permitting time frame, but that is an obstacle that also needs to be overcome. But again, I think there's -- that's in the works.

It makes sense. So that would be kind of the near-term opportunity. And then longer term, it would be kind of bringing your expertise in the carbon capture and sequestration to like other industrial areas and building out from there?

Right. Right. That's exactly right. You're going to have to do some carbon capture and sequestration in order to meet the objective. But getting the sizable opportunities away from our existing footprint will take more policy work.

Yes. That makes sense.

In our view.

And then I have another question from Pigeonhole. I feel like I've kind of heard this thing floating around that maybe some Permian crude pipelines could be converted to CO2, and then the CO2 from the industrial area, could go up to Permian and be objected in, and that also solves your crude pipeline overbuild problem. It seems like what you're saying is that it would be very difficult to the point of impossible to convert crude pipeline to CO2?

Yes. So I don't want to be too dismissive of that. I think moving it in liquid form has a tremendous advantage. And that does require high-pressure, very high-pressure, higher than even the new pipe build pressure tolerances. However, there may be some solutions around that by doing the compression and liquification at the other end of the pipe at the destination end. I haven't really heard that on the CO2. I have heard and there is some talk long way from here to there, I think, and complicated. But while there's not a need for this foreseeable future for a different additional crude takeaway capacity out of the Permian. And arguably, it's been overbuilt with what we have already and what's coming online right now. There may be -- there will be, I think, some need for additional gas takeaway from the Permian. And so some of the discussion is focused on could you rationalize the network by converting one of the crude to gas, and that's been done. That's been done. We've done it. Can you do that? And for Ergo, the need for a new build gas pipeline and also rationalize a bit the crude takeaway overbuilt. Again, a long way from here to there, there are customer commitments involved and all that sort of thing, but that's another conversion opportunity that has been kicked around by some.

Yes. Makes sense. Cool. And then I think more broadly, what areas -- this is for Pigeonhole, what areas is the new ventures group looking at which specifically do you think KMI will have the most competitive advantage in?

We talked about carbon capture and sequestration. The other thing we're looking at is -- so here, I need to make a distinction. There are certain things that we're pursuing that are within the existing business units. So when we talk about renewable liquid fuels, that's already being done and pursued actively by our business development teams. We handle it today in our products pipelines and our terminals group. That's -- we use the same pots and fans and pipes for that. As we do for others, right? So it's right in the wheelhouse of the existing commercial teams that we have there, and they are actively working on those opportunities. And we do use some of that today, as I pointed out, same thing with like hydrogen blooding and gas pipeline. There's some opportunity there, and we're exploring that. There are some obstacles to that, too. But what this group is doing are the things that are adjacent to it. So carbon capture adjacent to what we already do in our CO2 business, renewable natural gas, which we handle in small quantities, transport today, landfill gas has been a thing for a long time, right? But landfill gas, stockyard gas, those things, those are compelling, particularly in a low-carbon fuel standard environment, like California when added on top of the RINs value, those are economically compelling. Now they are kind of a developer business right now in the sense that it's very disaggregated in that market. It's very disaggregated, but there's opportunity there, economic opportunity that you can make work today. And when you combine that with things like vehicle fleets that are looking at CNG and LNG in the vehicle fleet, there's an end-use takeaway -- there's an end-use market for that, too, where people are trying to get their fleets -- trying to meet their own emissions targets by getting their fleets down. And when you take and take -- you can take renewable natural gas and get good rins value for it or in the case of if you capture it from an agricultural use, capturing it from a flare and doing that is not quite the carbon intensity score it's a nice low score, but it's not negative. It's negative when you're talking about stock yards. And so if you're trying to get to 0, you're going to need some negatives. And so there is an opportunity to do that. And there's a demand for it. On the fleet side as well. So there's some opportunity there that I think is actionable as well that we're working on and developing. And then you see with the circles as you move out to the right, other things that we're looking at that may be more in the longer term.