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

Good morning, everybody, and thanks for joining us. We're here with Steve Kean from Kinder Morgan. Before we get started, just wanted to make you aware of the fact that you can ask questions by clicking the button on your screen. Those will come straight to me, and I'll ask them on your behalf. You can also just e-mail me directly at [email protected], and I will ask questions. I'll see them in my inbox. So with that, I think what we're going to do then, we're going to turn this over to Steve, and he's going to go through some slides, and then we will open it up to Q&A, both from me and from the audience. So Steve, thanks for joining us, and it's all yours.

Thank you, Michael. Happy to be here. And Sean will do the drive in here. So if you pull up the disclosure slide, I'll start there. I'm going to run through some slides fairly quickly and pause a bit on our guidance for 2022, and then we'll get to your questions as soon as we can. So this is our forward-looking statements slide, always review this in our SEC filings for risks that could materially affect our results. Next page. Okay. This is our asset map. We're the largest natural gas transporter. Look, the summary here is that we've got an unparalleled and irreplaceable asset footprint that's been built up over decades in key commodities, in key markets and connecting key supply basins. And this network will be needed for decades to come. And that's going to be a theme really that I'm going to talk about as we're pivoting ourselves, the small pivots that we need to make as we enter the new energy evolution here, our assets are going to continue to be needed and can be repurposed in many instances and position us well for the future also. All right. This is the overview. $35 billion company, strong management alignment, good growth in EBITDA year-over-year, 6% current dividend growth -- current dividend yield. That puts us in the top 10 in the S&P 500. That's the top 10 with a well-covered dividend and with our cash flow after self-funding our investments and, et cetera, and on a very long-lived asset base, as I'll elaborate on here in a minute. Go ahead. So these are our overall strategy. These are our long-term strategic choices, if you will. The sector and the commercial model, stable fee-based assets. We try to get them under multiyear contracts. Not linked to commodity prices, mostly take-or-pay. And also, we're pivoting a bit at the time for -- we have formed a new Energy Transition Ventures group. We also have about 70% of our current backlog that's allocated to low-carbon investments. That includes natural gas, and that's the dominant contributor there, but it also includes some fairly significant investment in renewable natural gas, landfill gas as well as renewable diesel at our terminalling and pipeline facilities. We've got a low cost of capital. We've been getting our balance sheet in better and better shape over the last 6 years, reducing debt by over $12 billion in that time period. On our capital allocation, we're very disciplined, high return thresholds. We're self-funding all of our capital, and we do all this to enhance shareholder value. So this is our 2022 guidance, and I'll pause on this a bit. So you see the numbers on the left-hand side, and you see the numbers on the right, that is the variance after we took out the outsized performance in Q1 of 2021 related to the winter storm. And so you see this more on kind of a normal run rate business, or that's how we will show it to you. We have about $400 million year-over-year growth, and that's coming from tariff rate escalations, G&P and refined product volume growth, higher natural gas storage value, and a lot of that was related to people getting kind of a wake-up call with last winter, the need for additional storage capacity, particularly flexible storage. And growth projects that were placed in service, our acquisitions, Kinetrex and Stagecoach, and commodity price tailwinds, all more than offsetting the bit of natural gas recontracting at lower rates as well as lower CO2 segment volumes. So it's a nice EBITDA growth, and lots of excess cash that's available for share repurchases, approximately $750 million after, again, we paid dividends and after we fully funded our CapEx. So that's the picture on our 2022 budget, increasing our dividend to $1.11, and with net debt to EBITDA well within our metric of 4.5x, we're at 4.3% starting 2022. On the next page, you see how our cash flows are allocated. We're at 97% of segment EBDA. That's take-or-pay or fee-based or hedged. So very limited exposure on the way we contract for our assets. And on the next page, you'll see our customer base. Our customers need our services. They're largely end users of the products that we handle, and they're good credits. And because they need our services, that -- our contracts tend to hold up well even through distress or even bankruptcy proceedings, they still need our services to get the gas out of the -- get the gas to market, et cetera. So next page. So what we do today is valuable. It's going to be needed for a long time, and it helps with the energy transition. Energy transitions take a very long time. It's just the nature of the business. And I'll give you an example in terms of an energy miracle, nuclear power was an energy miracle, and that was a breakthrough in theoretical physics. At the turn of the last century, it turned into the atomic bomb. A decade after that, in the 50s, we had commercial nuclear reactors. They were in widespread deployment in the late '70s. And all of that, that miraculous development from then to then, 80 years, took about a 10% or 15% bite out of hydrocarbon demand. So as energy demand grows, the demand for what we need grows around the world, and will continue to need our assets. We can also use our assets, as an example, we can move renewable diesel in our -- hold it in our tanks and moving it on our pipes the same way we can move regular refinery grade diesel. So we have the ability to repurpose assets, and we're gradually pivoting our business as we see the energy evolution. So in sum, what we do is needed for a long time. We have options to repurpose and we can gradually turn the ship sort of a degree at a time as we position for the energy evolution of the future. And here are some of the numbers behind that. These are based on third parties, IEA, WoodMac, World Energy Outlook, et cetera. And you can see oil growth continuing over the period between now -- and this is a global look, between now and 2040. Natural gas is growing significantly more between now and 2040. And coal diminishing a little bit but still in wide use. And then, of course, you see more rapid growth on bioenergy and other renewables. So what we're -- this is going through 2040. What we need, particularly in our natural gas business, which is our biggest business unit, is not only going to be needed for a long time. It's actually going to grow as we work through the energy transition. The next page shows you a little bit more about natural gas, in particular. And I'll point out a couple of things here. The additional 23 Bcf a day that's expected on the supply side to meet this growth by 2030, this is a 2030 look, is where we have assets. It's growing in places where we have assets. Where the demand is growing over this period is also in places where we have assets, particularly LNG for export, industrial demand along the U.S. Gulf Coast, et cetera. The other point to be made here. So we're connected to the places that are growing, and we're also connected to the demand, the demand sources that are -- or the demand centers that are growing as well. And then a really important point here, too, is when you're looking at natural gas and the demand growth that's going to be occurring and where that's taking place, 80% of it is driven by Texas and Louisiana. And of course, that is largely LNG, but also some decent amount of industrial growth as well. And in those areas, it is easier to get stuff done. It is easier to get projects permitted, et cetera. These are energy economy states, and so easier to get things done there. And here, specifically on LNG, we are well positioned for this market for growing LNG demand for both transportation and storage. We have the largest storage position of any operator in the United States at 700 Bcf. That includes our Stagecoach acquisition. Those resources are needed for flexibility. We are over 50% market share on LNG export, serving those LNG export markets. And so we are very well positioned for this growthiest part of the natural gas story. The next page zeroes in a little bit on our Texas Intrastate system. The experience post winter, February winter storm in particular, shows how important highly responsive storage is. And we have a significant amount of it along the Gulf Coast. This is a great asset, a great network. It is the destination network for Permian gas growth that we're seeing over time. We built 2 -- along with our partners, we've built 2 newbuild pipelines from the Permian to this system. There's the potential need for a third, and we've got significant storage assets and last mile connectivity to markets here. So a great network, and operates on a market rate based as opposed to a regulated rate. Next page is just a summary of our acquisition of Stagecoach. So this is sitting right in the middle of our TGP system. It was very fortuitous that the 2 owners of this facility put it on the market. It made it available to us. We paid a little over $1.2 billion for it, added 41 Bcf of storage to the portfolio as well as 3 Bcf of transport, and right in the middle of our Tennessee Gas Pipeline system in Pennsylvania and New York, in a place where it's hard to build new infrastructure. So very happy about this. It's already modestly above its acquisition plan, and I think we're going to continue to add to that, we're going to make good money here. Next page is just the continuing story on the volume recovery -- go ahead and flip ahead, Sean. This is a little bit of an example on the repurposing that I talked about. We are repurposing some facilities and adding some facilities at our Bradshaw, and this is on our West Coast refined products pipeline and storage network, both the North Hub as well as we're developing, and that's under contract at Bradshaw, and a South Hub at Colton, which we're still working on getting under contract. And again, we can hold renewable diesel. We're going to build some additional tank as well as rail and truck facilities here, but we can manage this commodity within our existing network. So well positioned as the market pivots more toward renewable fuels there. The next page, I'll just make one point here, and that is that we're also well positioned for growing global demand. This network of assets on the Houston Ship Channel, including dock facilities that allow for significant amounts of refined products exports by our customers. So as demand grows overseas, we're connected to the most efficient, best refineries in the world, and we bring them to the water and bring them to the world. Another example on some repurposing. So we have an existing liquids terminal facility, several on the Lower River, Lower Mississippi River. We're doing a $65 million investment with NESTE for renewable fuels logistics. And this is really the feedstocks for renewable diesel. So this is gathering together all the veg oils and other feedstocks for renewable diesel. And we also -- we're trying to position ourselves here as a bit of a hub so we can attract other players to this, set this up as kind of a renewable feedstock hub and a network on our system. And so again, I think well positioned to add to the portfolio of customers here. So that's a little bit of how we're dealing with the energy transition as you look at our existing asset base. The other thing we've done is sort of looked ahead and we formed an Energy Transition Ventures group. This group has been very active. They're responsible for the Kinetrex renewable natural gas acquisition. And they cover the things that don't fall neatly within the existing business units. And here, you can see how we've broken out those opportunities. Investable today, I mentioned those already. Carbon capture and sequestration, we've put that in 2 to 5-year time frame. We are in active real transactions under discussion right now, but there are permitting and other obstacles here that we can get into. And then longer term, 5 to 10 years out on hydrogen. So these are the things we're evaluating that are outside a bit of the existing businesses that we do. Next page, CO2 emissions have declined since 2007, while our economy grew, while our power consumption grew, and a lot of that is simply natural gas replacing coal in the power sector. This is what we can do, too, around the world. Next page. I think I'll just skip over, Sean, talk about our Kinetrex acquisition. So $310 million, about $140 million of CapEx -- $146 million of CapEx. And then by the time we get to 2023, with the 3 shovel-ready projects that were acquired as part of this and that are under construction now, we get to a less than 6x multiple. And so the important point here is we are not loss-leading as we move into energy transition ventures, we are making very attractive returns on the capital that we deploy here. And there's a lot to go. There are hundreds of landfill sites that are available for exploitation in this business, and we hope to get our share of that. Next page, is a little bit comparing volumetric and on an energy basis, both hydrogen and RNG and the growth profile there. Off of a small base, for sure, but good growth opportunities there as well. The other thing that's important for a company like ours to do is be good at ESG. And if you flip to the next page, so even in the existing business, predominantly hydrocarbon business, we're ranked #1 by Sustainalytics in our sector, and we're in the in the top 10 in 3 of the ratings agencies. This is a big area of focus for us. It's important to our regulators. It's important to permitting authorities. It's important to our customers, increasingly, particularly international customers, LNG customers, and it's important to our employees. And so being in the business we're in, we have to be good at this, and we are. And then finally, this is the summation for the investors, stable cash flows, 6% yield, well-covered dividend, and dividends and CapEx self-funded, and we got $1.4 billion of repurchase capacity remaining in capacity this year on the order of about $750 million. And with that, Michael, I'll turn it back to you for the Q&A.

All right. Thank you for that, Steve. I appreciate it. I'll just start with a question that came in from an investor while you were going through that. The question is on the 2022 guidance or budget. Does that assume any contribution from Ruby?

It does not. You mean an injection into Ruby? It does not. As we've said, and I'll just press play on this, I mean, we are going to make an economic decision around Ruby.

Okay. I think the question was also, is there any, like, cash flow contribution assumed from Ruby in 2022 in your budget?

No.

Okay. Perfect. So I wanted to ask a little bit a question on what you just released in terms of the budget for '22. So really the question is, how did you arrive at your -- the 3% dividend growth and the -- where there's a bigger number for buybacks than you've put out in the past as a possible number? And I'm assuming that's kind of -- I don't know, is that a target for buybacks? Or is that just what you are authorized to do? Can you just talk through that.

That's a capacity number. And so it's not a budgeted number. We don't have -- we don't have slotted in at some price assumptions. The actual deployment of $750 million, it's a capacity number, given that we had growth in EBITDA and additional balance sheet capacity and we're under our metrics on -- we're better than our metrics on leverage. So that's a capacity number. We'll continue to be opportunistic. As I think you pointed out in your note, I mean that's been our philosophy, we'll be opportunistic. We'll do it based on returns. And we think we'll have some opportunities. But we're not doing it programmatically, we're doing it opportunistically. The other part of that is that we didn't assume -- in our DCF per share, we didn't assume any buybacks there either. So we didn't remove shares as the year went on either. So that would be an upside on the DCF per share basis as we execute.

Okay. Got it. If we just go back to the current year, 2021, I think if I look back at last year at this time, you are allocating up to $400 million to buybacks. But -- and you ended up with this windfall profit in Q1, but you used that cash flow, correct me if I'm wrong, to basically delever the balance sheet and do the Stagecoach acquisition. So I was wondering if you could just walk us through the decision tree to do that versus buybacks or something else?

Yes. No, good question. Stagecoach is just a beautiful asset that's going to make us good money. And so if you're a return-driven company, if we're thinking about our investors, we have -- we are aligned with our investors. I'm compensated entirely in Kinder Morgan stock. I don't get a salary or a bonus. I mean that's been a tradition of our company to be very, very much management aligned with shareholders. That's the way we operate. Kinetrex and Stagecoach both were very good uses of that capital that we had, extremely good uses, and adding value to the firm for our shareholders. Now as we look ahead, we're at kind of the low end of our range. We talked about $1 billion to $2 billion of capital opportunities. And that's what you're looking at is comparing the returns that you would get on capital deployment versus the returns that you think you earn by buying back shares. We'll look at those decisions going forward. And we look at them, as we always do, on a risk-adjusted basis, meaning that a project return has to be, I would say, well better than the return we would expect to get from a share repurchase because you've got execution risk there, right? You don't have execution risk on a share repurchase. And you know you can transact and you know that you're going to take shares out of the denominator so that every remaining shareholder's share of the company is larger, right? And so we'll be looking at it on a risk-adjusted basis as we look at capital investment opportunities versus share repurchases. And the share repurchase is an attractive return opportunity for our shareholders. So it's definitely in the mix. And we've got more capacity to do it than we've historically had.

Got it. So maybe on -- while we're talking about returns. Obviously, you've talked about the need potentially for a new gas pipe out of the Permian by 2024. So I really had a bunch of questions, which really just speaks to kind of what's going on behind the scenes to the extent you can tell us. When would you need to FID something like that to have it in service in time for when it's needed? That's kind of the first question there. And then I'm just wondering, with what seems like a shift in the Permian where the privates are the ones who are really drilling and presumably the ones who will need the capacity more so than the public companies, how does that change the dynamics for you going forward in terms of trying to source a project like this? So maybe I'll stop there.

Okay. Yes. So 2024, that is our view, and that's a view based on conversations with customers and including a specific conversation that I had with a potential customer where I heard that directly. And however, as you well know, I mean, people -- and this gets a little bit to your question about the privates. I mean, as you well know, needing a pipeline and actually getting it under contract are 2 different things, right? And oftentimes, there needs to, to be frank, there needs to be some -- there's real pain experience first when you're dealing with a capacity constraint. Permian gas prices were negative for a while before PHP got finished, right? And so to some extent, producers are understandably reluctant to sign up for a 10-year, a 15-year commitment for a new undertaking, and they want to be confident that they can demonstrate that it's a reasonable thing for them to do, et cetera. And so sometimes that takes longer. So I wouldn't -- I'm not projecting a new pipe in 2024. I'm just projecting the need, okay? In terms of how it sort of racks up now, I think permitting has become more challenging, and I'll come back to that in a second because that's a -- even in Texas, okay? Because that's a bit of a complex discussion. But let me talk about timing overall, probably more like 30 months from FID to go -- to actually in service, rather, and -- but there are some pluses and minuses in play here. I mean, and mostly pluses in terms of the need for the pipe. If you contrast it to prior periods, gas is actually worth something now, right? I mean, there was a lot of oil-directed drilling that was -- happened to be producing liquids, which are valuable, but natural gas is associated. And so it was nearly a waste product, right? Now it's valuable. And also, flaring is less tolerated now, right? And so you can't just, "Oh, I got my oil, great. I'm just going to burn this stuff." You can't really do that anymore, or not to the same extent, certainly, and not for the same length of time. And then ESG is a primary consideration for a lot of folks. And so those factors all push to our tailwinds against getting additional infrastructure cited. Our advantage, you haven't asked about that. But I mean it is that Gulf Coast system that I showed, right? We get the last mile. We get people to markets, to actionable markets and multiple ones. So that's where we kind of bring an advantage to the table. In terms of how it might rack up in terms of how the private equity players participate, et cetera, you're right. The statistics I've seen shown nearly 50% of the rigs in the Permian right now are private capital backed. Those guys are not 10-year contract signers, okay, generally, okay? And so what does that mean? Well, there are also some relatively big players out there like -- I'm not saying anything out of school here, I mean, you know it from what you see out there, Chevron, Conoco, Pioneer and I'm missing one here, Chevron, Conoco, XTO, Exxon, big players out there, sophisticated players. Those are the kind of players who often want equity as part of the deal, right? That's how the last 2 got done. But also, you have -- and this is where the privates get brought in, I think, is that you've got aggregators, and those aggregators tend to be the big processors, right? And those guys sometimes speak for their producer -- their upstream producers' gas, meaning that they help them decide where to put it. And so you could see a sort of a communitizing a bit the cost of the downstream takeaway transport in that kind of a structure as well. So look, it is harder to couple together probably than it was a few years ago, but it can still be done.

Perfect. While you're talking, a question came in from an investor, it's a pretty -- this isn't easy. What's a reasonable long-term growth target for earnings and dividends?

Yes. Look, we do, I think, a very good job of showing you the macro fundamentals that surround our business, and particularly out in time, particularly out in decades in time, right? We also do a really good job, I think, of giving good visibility into our next year's budget, and a lot of transparency in how we put it together. And you'll see more of that when we give you the details in January. What we don't do is make 5-year plans and 5-year projections like that. I mean it's just there's so much variability that can come into play. We're a very stable business. And if you look at our history over time, we've performed very well in up times and down times, et cetera. It's part of our commercial model, the way we structure our contracts, et cetera. But I think it's ill-advised for us to try to project outside of what we do for 2022. The current year where we update our guidance as we go through the year as well as the out budgeted year. But we instead try to show the capabilities of our network, talk about the commercial trends, talk about the macro trends that affect our business.

From revenue, that's...

On the dividend, let me say, too, I think we expect to see a dividend growth and growth that we are confident is well covered and that is consistent with the underlying growth rate of the business. And so those things enter into our decision-making as well.

Perfect. I want to pivot here a little bit. In terms of your -- maybe talk a little bit about the natural gas storage market. Obviously, I think that was part of your thinking in the Stagecoach acquisition, and correct me if I'm wrong there. But yes, I just wanted to get some -- any thoughts you have there in terms of where storage rates are trending versus where they were pre-COVID, and how you see that playing out over time? Obviously, there's been a lot of changes in the gas market here in the last year.

Yes. Yes. So storage, we are bullish on the value of storage over the long term. I think you have to make 2 buckets of storage to just think about it appropriately. There's multi-cycle storage service, and that's what's really beneficial to helping backstop renewable power, for example, and things like that. And we've got a significant amount of that, particularly in our Texas business and Stagecoach is also, if you do the simple storage map, ignoring things like ratchets when you get to certain inventory levels, et cetera, is about a 3x -- a 3-cycle storage, which is good, flexible storage. And again, in a part of the world where it's hard to find it. And so we're bullish on the value of that asset. When you look at more seasonal storage, these are the aquifers that you put it in the summer, take it out in the winter. That -- the value proposition is less robust there when you're in a backward-dated market like we are today, right? Who wants to put it in and take it out later at a lower value, right? And so the users for that, and we love having these customers, right, but they tend to be the utility users who are putting it in -- not marketers. They're trying to put it under contract. They're doing it to meet their delivery obligations during the wintertime. And we get good value for it. We contract it for fairly long term. So you put it to bed with utility customers. And then you can carve off little pieces of that to do shorter-term or higher-cycle service, and we can also do loans. So this -- we have a park and loan book that's short-term business. It's a loan market right now, not a park market. And ultimately, they'll switch around. It goes back and forth. Right now, it's a loan market. But those are the 2 big buckets and the different value propositions associated with each. But just overall, particularly as we have more intermittency in our power grid generation sources, storage is going to continue to be more valuable. And that's valuable to our LNG customers as well as they're managing through things.

Got it. In our last 60 seconds here, maybe just another question came in from the field. It's basically a question about M&A, just your latest thoughts. Is that -- do you see M&A happening? There's always talk of M&A in midstream, but it doesn't ever seem to materialize as fast as people think. So where do you see Kinder Morgan playing there?

Yes. It's been right for 6 or 7 years now. But other than simplification transactions, it hasn't largely come to pass. We would point to the asset acquisitions that we did. I mean I could think of Kinetrex as an asset acquisition. It's a company, but you know what I mean. Stagecoach, we bought a small piece of pipe that fit in nicely in our intrastate system 1.5 years ago or so. So we're -- we look at both. We look at corporate transactions. We look at -- I think the thing that's probably changed over time is just our real focus on a strong balance sheet and not interested in doing something that wrecks that story. And so that makes us even pickier, I guess, you would say. And a lot of things have to work, and you can't call your shots there, right? A big, big transformative transaction, you can't really predict that. A lot of things have to come together. But we're going to be disciplined. That's -- I would just underscore that and leave it at that.

Perfect. Well, that's all the time we have today, Steve, thank you very much for doing this with me, and hopefully, we'll do it in person next year, and happy holidays.

Absolutely. Same to you, and we'll be doing our investor conference in person in January in Houston, Texas. Look forward to seeing people face-to-face. Thank you, all.

Thank you.