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

[Audio Gap] acquisition these fit right in with our existing TGP system, and that creates some substantial synergies for us on the commercial front in capacity creation and some limited amount of cost-related synergies as well. We believe strongly that the demand for storage is going to continue to increase over time. We think that's been illustrated here with recent events. And these assets are sitting in a part of the country that needs that responsive storage. This is not just single cycle, seasonal storage, meaning summer winter storage. This is flexible storage that we can use in concert with our TGP system to provide really quality services to our customers, help meet extreme needs in the winter, et cetera. So 41 Bcf of certificated capacity in 4 facilities, 3 Bcf of transport capacity with interconnections, not just at TGP, but other Northeast serving pipeline assets. We've got good contracts there, 80% take-or-pay 3 years, anchored by producers as well as utilities. And we have market-based rates on our storage facilities, which is also an important consideration. So this shows you the confidence that we have in the long-term mutual gas and specifically in what we do in natural gas, which is not about providing a commodity. It's really about providing the flexible service, the transportation capacity and the storage capacity on demand as we see increasing variability in takes related to more renewables entering the stack. So a very good asset, and we believe natural gas will be a big part of the energy transition, we think we'll do very well with this. On the next page, we talk about Kinetrex. This is a smaller acquisition but potentially a much faster growing one. And this is a step out, a bit of a step out. It's consistent with what we already do. We're in the natural gas business in a very big way. This is a combination of LNG and also renewable natural gas. And so LNG, believe it or not, there are things called gas islands out there where it is more economic to actually put an LNG facility on site and serve loads than it is to connect to the utility. Now that's relatively rare, but it's not uncommon in places like New England. And a couple of these deals have been done here by Kinetrex prior to our acquisition. And -- but we think that while that will continue to grow and we will have some opportunities there, the real growth is going to come from RNG. So the specific focus here, there's a lot of different ways to approach renewable natural gas and different ways to get it, our focus here is on landfill facilities. These are facilities garbage comps that emit methane, and that's something -- you have to do something with that methane under Clean Air Act regulations. A lot of times, it's just sent to a vapor combustion unit. What we would be doing is capturing it and putting it into the natural gas stream. So you're basically purifying it, increasing the BTU content to get it up to pipeline quality gas. There's a lot of open field running here. This was one of the few platform investments available, meaning already a good foothold in this, what we think is a growth area. 900-plus landfills -- there are more landfills in that, but 900-plus landfills. A significant portion of those are good opportunities and less than 100 sites have really been exploited for this purpose today. You can see on the right-hand side what we think the growth is 2 different scenarios. One is the stated policy scenario. And the second is the sustainable development scenario, and they're different in some important ways. But the key is how many how many tons from the energy and industrial sector of CO2 emission -- or greenhouse gas equivalent emissions will be required. In one case, it's 35.8% getting reduced in the sustainable developments, 36 billion tons getting reduced to 10 by 2050. And so that will drive up demand for this. But even without that, we see significant growth in this sector between now and 2040. So again, a lot of these developments available for us to exploit, very little penetration to date. We can provide the access to the grid, access to all the customer relationships that we have in the natural gas business today, utilities and on the industrial side, refineries and others. There are 2 markets here really. One is the transport market, and that's what has RINs associated with it. RINs, Renewable Identification Numbers, those go with energy that's going into transport, like in fleets, et cetera. That that value is extreme, right? At today's RINs prices, that puts the price of natural gas or the value of natural gas from these sites at around $36, okay? So very, very lucrative. But there's also another market there, and that's the voluntary market. And that is people who are just trying to meet companies that are trying to meet their greenhouse gas emission commitments, and they can do that in part by even outside the transport fleet, getting some of their natural gas from RNG. And so we've got 2 good markets there. We'll be looking for ways to share or reduce exposure to RINs. So the RINs value is great. And if years fairly sturdy to us. We conservatively modeled it in our acquisition economics. And as you can see here, we didn't -- and this is a very important point. We didn't compromise on return to make this entry into into the energy transition. We're getting a little better than 6x on a 2023 EBITDA once we finish the build out of the projects that are already under contract. So we didn't have to sacrifice our return criteria. We got a nice asset here that we think we can grow and grow pretty substantially. Okay. Next page. All right. So this is about our base business, and we're going to cover that, and I'll touch on a bit, specifically drilling a little more into energy transition as well as ESG. Now we have what we think is the best natural gas position in the United States, largest pipeline transmission network, but also importantly, for the point I made on stage coach. We have the biggest working storage capacity in the United States. We're the largest independent transporter of refined products and the largest terminal operator and then we have a CO2 business, which we use today for enhanced oil recovery for ourselves and our customers, but also has a bit of new life here as we're looking at carbon capture and sequestration projects. You can't use every pipe to transport CO2. You need purpose-built pipe, you need high-pressure pipe and we've got the ability to attach ethanol and processing facilities on economic terms today. So the business mix, you see 62% natural gas. We also have -- most of our project backlog is devoted to natural gas. And then the next 2, the 16% and 15%. Most of that is refined products. So you can think of those businesses together, 31% and of our segment EBDA is associated with refined products primarily. And that includes things like renewable diesel, ethanol and the other things that are emerging beyond that in the liquid fuel market. and then the CO2 business, as I mentioned. So a very nice network of assets, well positioned for the long term, whether in their current use or in other uses. Okay. So the overall investor picture here, we think it's a core holding in any portfolio, you can see the numbers there. One of the 10 largest energy companies, I'm very proud of the fact that we have a highly aligned management team. Management Board together owns about 13% of the outstanding securities that causes us to behave like principles, not like agents. And then you can see the rest of the statistics here, including a nice yield and also a significant return of capital program in the form of share buyback. Next page. So I think our strategy is really defined by the long-term strategic choices that we make, which is we're in the U.S. energy, midstream, transportation and storage business and how you contract for it. We contract largely on a take-or-pay or fixed fee-based cash flows. We are pivoting to the low-carbon future with the investments that we're making. And importantly, as I said, I think a lot of our assets can serve those new energy forms as well. Some with modification, and some cases, not very significant modification. The other big choice you make is how you capitalize yourself. We have worked very hard to get to a point where we are a solid investment-grade company rated BBB flat across all the agencies. That 4x debt-to-EBITDA number is supported by the fact that we're heavily take-or-pay, heavily fee-based long-term contracts, secure cash flows, creditworthy customers, most of whom need what we do, okay? So that merits that ForEx getting us a BBB flat. We've reduced our net debt by over $12 billion since this quarter of 2015. And then how we allocate capital. Conservative assumptions, we leave ourselves some margin of safety on the investments that we make. We fully self-fund. And then beyond that, we -- any leftover capital is available for dividend as well as share repurchases. So our order of operations have a strong balance sheet, invest in attractive projects grow the dividend, a well-covered dividend and then repurchase shares. And all of this is about creating value for our existing shareholders. That's the objective of all of this. Okay. Here's a little bit more on our contract composition. Again, 68% take-or-pay, 25% is fee-based. So we operate largely independent of fluctuations in commodity prices. We collect a lot of this cash flow, whether people are using our facilities or not. They pay us for the capacity. Obviously, we want them to use it. That's good. That bodes well for long-term recontracting and renewal, et cetera. And then we hedge a little bit of the commodity exposure that we have, leaving 3%, that's not either take-or-pay or fee-based or hedged. Next page. And again, our customers need what we do, and we've experienced that even when our customers get in difficulty. 70% of our customers are end users. They need us for what they do in their everyday business that's utilities, integrated energy refineries and other industrial users. And so people need what we do. And that, again, supports the stability of our cash flows. On the right-hand side, you see that most of our customers are investment grade or where not, we've been able to get substantial credit support, leaving only about 2% of our exposure is from B- or below-rated customers. So again, stable cash flows underpinned by contracts with fees or take-or-pay, provided service to customers who need us and who have good credit. Okay. So a little bit more on energy transition. We believe our assets are positioned for the long term very well. We think that natural gas is going to be 2 points on that. We think natural gas is going to continue to be an important and growing part of the global energy picture for a long time to come. It just has some very stubborn advantages, let's say, from a dispatchability in the power sector to its environmental characteristics to its cost, its reliability, all of those things. And energy transitions take a very long time. They take longer than people think. They take longer than what you would what you would expect from reading the mainstream media. And this is not just our view. If you look at any objective thoughtful bottoms-up analysis of how an energy transition is going to be achieved to a lower carbon future. You can see that it will really -- it will take a long time. New technologies have to be developed and not only develop, not only invented, they have to be deployed and they have to be deployed in a cost-effective way. And to pull more people out of poverty around the world, you need cheap and affordable and reliable energy, not more expensive and less reliable energy. So Vaclav Smil. I'll just let that slide a minute just for a minute. Energy transitions take decades. That's about the most succinct way that he's put a lot of is good and thoughtful riding on energy transitions, but it's the truth. And then also what we do will help meet environmental goals. We've done a lot of that already as we'll get into in a future slide, and our assets could be repurposed and be used for different things as we are already starting to do. So we're positioned both for today and the future. All right. Go ahead. All right. And here's the energy picture. Again, you see the growing on the left-hand side, the growing natural gas need, declining coal, increasing bioenergy and other renewables, but natural gas playing a long-term role in the energy picture globally. And that's very important. And it is very important because we have, to us, because we have gone out of our way to be a good supplier to our LNG customers. So for us, it's not just about domestic natural gas demand. although that's important, and we do see that growing modestly as well. It's about being positioned well to take advantage of growth in LNG demand around the world. And so that our transportation and our storage assets help support that development and help support U.S. exports. We also help firm other renewables right? They need us as a backstop. That's how we market our services in California. We are the on-demand provider, right? And they need that increasingly, they actually need it more. The more renewables penetrate. Next slide. So here's, again, the substantial growth projected for U.S. natural gas. And a lot of that demand growth, as you see, is on the export side. We're a little over 50% of the exports to Mexico. We're a little under 50% of the exports on LNG and a very important point on the lower right-hand side. About 80% -- a little more than 80% of this forecast demand growth is occurring in Texas and Louisiana. So it's important as you look at the -- around the country, the difficulties in permitting infrastructure. These are states where you can get infrastructure done. And they are states that are energy states. And so it's important to note that over 80% of the forecast demand growth, this is our view as well as Wood Mac's, is in Texas and Louisiana. Next slide. So here's more on -- we participate in LNG 2 ways. One is in a very small way in that we have a small LNG facility that's under a 20-year contract to Shell. That's at Elba Island, Georgia. And so these are modular units. The total output there is about [ 350 ] a day. So this is a small a small part of the picture, but it's a pretty flexible part of the LNG picture. That's contracted in a way that we like to contract as an LNG provider directly as an LNG provider, which is that -- We've got it under long-term contract demand charges from a significant and valuable customer with good credit. Most of the way we participate in the LNG activity is to be a good provider to Cheniere, Cameron, Freeport. And so it's about providing natural gas transportation, the supply diversity that our system enables them to have. And then the 700 Bcf of storage capacity and particularly our high deliverability storage capacity that we have in the state of Texas is very helpful to those customers. So we have 4.4 Bcf already contracted, 1.7 still to come online with Cheniere as well as Venture Global. We have 16-year terms, and we're in active discussions on 2 to 5 Bcf. This is an important business for us. It's a growing business for us, and it helps us participate not just domestically but globally, but participate globally with a risk profile that we like. We can make good money here without being exposed to global commodity market risk. Next page. So a little bit deeper on our Texas Natural Gas System. This is a little bit different from our other businesses. Most of our transmission lines are interstate. They're common -- not common carrier, but open access natural gas pipelines. In this business, we're doing some purchasing and selling of gas and optimizing around our storage assets by buying and selling the gas. Now we do that in a particular way. We're not taking speculative positions on the price of the gas. What we're doing often is buying gas with reference to an index, typically Houston Ship Channel and selling gas with reference to that same index. So buying a Houston Ship Channel minus, selling a Houston Ship Channel plus at the end-use customer level, for example, and then using our storage to optimize for disruptions in the market, et cetera. Highly responsive storage is increasingly important. It was critical for us in meeting human needs during Yuri. During Yuri, our storage feels we're on max withdrawal during that time because there was a lot of gas that was frozen off in the Permian. We were able to serve our human needs customers. We made money during that process. We prepared for that. So we had made some investments to make sure that -- particularly that our storage fields were winterized. Those are very concentrated supply sources. That's not scattered wells out in the field. That's concentrated sources of supply. And then we also winterized with our people effectively. Our operations team are used to responding to difficult operational environments. They deployed before the roads became impassable. They kept our fields up and running. They fix stuff if they're broke. They did all kinds of things to help support that. We've already begun to see here an awakening in the Texas market to the value of storage and have seen on some of our renewals or new contracts, a significant escalation in the storage values. And we think that's appropriate. And we think that were in hope that we're going to see that transpire around the country. We've seen a little bit of that on the interstate side as well. And these are well positioned for LNG facilities. If you think about how Cheniere is going to grow Corpus, for example, very well positioned. And 2 major sources coming in from the Permian on our GCX and PHP lines about 2 Bcf a piece. So significant value there as well. Next page. Okay. Switching over to refined products, which, as I said, on a combined basis, is most of that 31% that we show in our products pipelines and terminals business. The volume recovery is still playing out. You still see, versus 2019, and this is using Q2 numbers, the road fuels, gasoline and diesel are essentially flat, and there's been good recovery there, but jet fuel is still down 26%. And that comes home for us, particularly in our facilities that serve SFO, LAX, Dulles, I mean, where you have more international flights. And so it's not fully recovered yet, but it's on the road to recovery. As you all know, from people are delaying return to office plans that reduces commute consumption for gasoline. People have -- people, kids back in school, et cetera. But it's recovering, but this latest surge is a hitch. And then we'll see how we look on the other side, both how quickly this ends and then how the demand recovery looks on the other side. Our G&P volumes. We're up a bit quarter-on-quarter on Hiland and Haynesville. We expect more in Haynesville is very economic. We would expect more development there. We've got good upstream customers on our Hiland assets in the Bakken, and that's leading to some growth there on a quarter-to-quarter basis. Next page. All right. This is energy transition-related things, and this is a good illustration of what I've said a couple of times now, which is that some of the stuff that we have today, the assets that we have today can be used in -- for new things. Now we're going to do some expansions associated with developing these hubs because there is more volume and there's a need for segregation. So there'll be some tank type unloading and offloading facilities in order to be able to receive the product and in order to be able to distribute it out to the markets where it needs to go. But we think we're well positioned. We're working on a North Hub, well advanced there as well as a South Hub at our Colton facility, about $60 million on an all-in basis, but there'll be more of these to come. California is first. We're working on some things in our Lower river region on the terminals. We think that's going to be a nice opportunity for us as well. And so if you look at things like diesel and long-haul trucking, that's very hard to do with electricity. I mean, I don't remember the exact numbers, but it takes up a substantial portion of the payload capacity of trucks on the long haul with just the battery weight. So there's going to have to be some solution, CNG or LNG or liquid fuels like renewable diesel. So that's a nice growth market that we don't think is really electricity ETV can really be EVs rather can really be competitive in. All right, next page. Okay. Our terminal network in the Houston Ship Channel. I mean, the important thing here, this is the biggest refining center in the United States. And our asset -- we have a number of assets there, and they're integrated. They're integrated through inbound and outbound pipelines, cross-channel pipelines to connect our facilities. We've got ship docks, barge docks, truck base. We've got unit train facilities. All this to say that we provide an important link between the refiners, that big refining center and getting to market. And so we're not, as John Schlosser, our President of the Group, says, this is not a bunch of buckets here. These are assets that are used for blending and for other ancillary services that our customers need. These are high value, they're not contango play assets. And this is an example, too, of how as the energy transitions, we can use these assets differently. We have a lot of docks. We've moved as many as 300,000 barrels over those docks to send to international markets, Latin America, Mexico, Europe, et cetera. Those docs will become perhaps more valuable as time goes on, even if domestic consumption rolls over, okay? So again, we're keeping our eye on all these developments and we have, we think, the kinds of flexible assets that can be reused and pivoted toward the transition as it unfolds. Our Energy Transition Ventures group small group staffed internally. Kinetrex was their first deal. You see in the circles there, how we view things. RNG, renewable diesel and even some renewable power at our existing facilities. That's actionable now, and we're working on it. Carbon capture is a question sequestration. We're also working on it now. There are some permitting issues and some commercial issues to overcome there, but we believe that's a live opportunity 2 to 5 years. For economic reasons, why we think people will experiment with hydrogen, we see that as a longer-term play. But we're able to do these things and participate in this market as we showed with Kinetrex in a way that doesn't sacrifice our return criteria for our shareholders. Next page. Something that probably many of you know, but not many people in the mainstream media, the public, et cetera, now is that we've actually been reducing our CO2 emissions in the United States. This game is going to be won or lost, not here, and the decisions that are made are not going to be made, the choices are not going to be made in North America and Western Europe, they're going to be made in China and India, and that's something I think we tend to forget too. But anyway, the U.S., we've reduced CO2 emissions by 860 million metric tons from their peak. And a lot of that is on the power sector, 805 million metric tons from power. So most of it is that. And so then what's that? Most of that is gas displacing coal in the generation stack. And there's more of that for us to do. And there is more of it that we will do. And that can be done globally. There's no reason that we can't do that for China and India, et cetera, with our natural gas exports. And I think that's something that the Obama Administration clearly understood. And hopefully, we'll see the current administration understands that as well. This is a big part, not only of meeting energy needs natural gas, that is. It's also a big part of reducing greenhouse gas emissions Okay. The renewable fuels I mentioned the advantage of liquid fuels or others in a renewable diesel in serving the long-haul trucking market a place that energy vehicles really can't serve. And here you can see the measures both on a volume -- on a volumetric basis and on an energy basis for RNG and also for hydrogen and over the time period that we're talking about. Going back to the left, you can see significant amount of penetration for global biofuels, we believe, and we can handle those in our facilities. We can put it in our pipes, we can put it in our tanks. And we do that with ethanol today. We even moved some ethanol in one of our pipelines today. There's a little retrofitting involved, but we can handle it. And we can do the same for biodiesel and renewable diesel. And we do a little of that today, and we expect to do more of that as this market grows. ESG, Important for our company, while we believe that the things that we do have long -- things we do today have a long life and a long runway. It is also important for us to be responsible in how we manage ESG risk. And you can see we've been ranked #1 in our sector, both narrowly defined and broadly defined number one, in terms of how we handle ESG risk. That's very important to us. It's something that we're going to keep fighting for and working on because it's increasingly important not only to our investors but to our customers as well. Next page. So in conclusion, a compelling investment opportunity, stable cash flows, a good yield and dividends and CapEx that are self-funded, a repurchase program management is highly aligned. And we've got really an irreplaceable network here, secured well commercially and with a strong balance sheet. And so -- and we're working on the ESG part of this to make sure that we stay #1 or stay highly ranked there. So I think a good overall summary of our investment opportunities. So thank you all very much for your time this morning, and look forward to seeing some of you in our one-on-ones and our 10-on-1 meetings later in the day. Thank you all.