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

On that specific reorder, obviously, [indiscernible] have a rate for refusal on that? Or how does that work?

We have -- I don't know exactly what our right is our -- in our JV agreement. So -- but if they were interested in divesting that we would be very interested in talking with them about it. And it would just depend at that point on a price. But I will say this right now, I don't think Southern Company is interested in divesting their stake in SNG. I think it's a very valuable piece of infrastructure and they recognize that.

Next on the balance sheet. [indiscernible] to bake in any of that in your underwriting necessary returns? Or how do you think?

Yes, every year, we look at our cost of capital, and we update our -- as needed, we'll update our return requirements to reflect the appropriate cushion between our cost of capital and the required return. It hasn't moved enough yet to actually adjust -- to force us to adjust our return requirements. And so currently, our return requirements are pretty consistent with where we've been. We have seen the cost of debt come up, but we've seen our cost of equity offset that to some degree. And so we -- on our overall weighted average cost of capital, we're in pretty consistent shape with where we've been. If interest rates continue on the trajectory that they've been on that might change things. But we have a very large cushion between where we're acquiring our returns to come in and where our cost of capital is. And so that also gives us a fair amount of cushion before we actually have to formally adjust where the return comes out.

Just a quick question on product pipeline business. Obviously, [indiscernible] and additionally, [indiscernible] are sold out clearly going to be some innovation and substitution moving around, I think, in the end markets, certainly more outside the U.S. credit potentially. How do you guys view the volatility side, on the end market is going to control over, but which could have low back into the long tail of intrinsic value on those kinds of assets. [indiscernible]

Right. Well, we think our main business is natural gas and transporting and storing natural gas. And we think that's the hydrocarbon and the fossil fuel that has the longest lead time. So we're pleased to be in that business. Between 60%, 65% of our business is natural gas and even more of a percentage of that is where our growth investment capital is going into. So it should continue to increase as an overall percentage of our portfolio. And we -- and we're pleased to see that because as you're right, I think the -- I think there's going to be a near-term potential impact on domestic demand for other hydrocarbons especially in certain parts of the country. As it relates to our business specifically, where we have refined product pipelines, which are gasoline, diesel, jet fuel, those assets have a regulatory regime around them that if you see volumes come down a little bit, you can adjust the rate in order to kind of keep your revenue pretty flat or maybe slightly growing even. So we have some built-in protections there. But it's something we talk about. Our internal projections suggest that there's little decline in that -- in the volumes that we expect across our footprint, actually, a little bit of an increase for the next, I think, it's 1.5 decades, maybe 2 decades before we start seeing that level off and then potentially decline a little bit.

Increase is mostly coming [indiscernible] ?

Gasoline, gasoline, and I think Jet stays increasing a little bit. But for us, our main product is gasoline. So that's where we're focused on. But you're right, Jet doesn't seem like it has a decline eventually. It looks because there's not much of an alternative and the gasoline impact eventually it looks like it's more hybrid related than pure electric vehicles. It seems like that's where the demand has really materialized that and efficiencies of ICE vehicle engines.

David, maybe we can go to the Tennessee Gas Pipeline open season 2019 project, and that's closed now the open season. Any sense of how demand came in on that? I think you were soliciting around 500 million cubic feet a day. Just any update on demand for that project.

Yes. So this is our TGP 2019 project, which, yes, just over half a day of demand was in the open season. The open season was very positive. It was a favorable open season. It was nonbinding. And so it will take a little bit of time to go back and solidify shipper commitments and so forth. But the open season results were very strong and positive. And so we'll see where that goes eventually. But it's -- there's definitely a lot of demand there. So this moves -- this would move gas out of the Pennsylvania area to Tennessee. And so -- and we would expect that we would have demand to potentially speed power generation demand along the way. And it's just another piece of the puzzle to solve the incremental demand for power generation load in that part of the country.

And the company has talked about potentially a larger expansion of Tennessee Gas Pipeline, which could feed into the Southeast. How capital efficiently can you do that and go above the 500 million cubic feet a day and kind of what are the limits on how big you could go on a TGP expansion pulling gas out of Appalachia to the Southeast?

So I'm not going to comment on the specific upper threshold because I think it's going to depend on the amount of the rate that shippers are going to be able to bear because it's not a cheap expansion to go much higher than the one that we had in the nonbinding open season. And so -- but it could be multiple times the 500.

Multiple times 500 million cubic feet a day that you could eventually get to.

Right.

Interesting. Any other questions from the audience? Okay. So beyond -- I guess we've -- one follow-up just on the Southeast piece. You've historically talked about expanding Mississippi Crossing which will bring gas from the west from TGP into the SNG network. Is that project still something that you're actively assessing to bring gas into SNG or is the new Southeast Connector taking kind of a different approach on how you source gas into the Southeast?

It's something that is not going to be as has focused as much for now. I think for right now, the connector is going to be a priority, but it is something that we've continued to have at least early stage conversations with potential counterparties on it.

Okay. And then beyond kind of bringing gas out of Appalachia and then bringing it to demand in the Southeast, maybe you could talk about what other areas of your footprint, you're seeing growth, whether that's Florida, the Desert Southwest, Upper Midwest even, just other areas you're seeing growth across your footprint?

Well, one area that we're seeing growth in is Texas, power generation demand, LNG demand still and then, of course, demand for additional supplies to reach all of these different markets. One of the projects that we've talked about publicly is this Permian Link project, which would be feeding demand in the Panhandle, a little bit in New Mexico, maybe reaching into Oklahoma. It's -- it would be an NGPL project, and it's gotten some really good traction. I would say it's not in our backlog, but it's something that I think we have some real demand to feed power generation and those negotiations are going well.

How does the new white water pipes because white water kind of went big and not one pipe, but we're going to build two Monster, 48-inch pipelines out of the Permian. How does that impact discussions on doing a project like Permian Link, where you're pulling gas out of the Permian?

Right. Great question. This one is uniquely positioned, I think, because it's a demand pull project. It's not a supply push. So we think it's relatively insulated from an impact from Solitude.

M&A.

The other piece -- I'm sorry, one other Keith comment there is because NGPL has some well-positioned storage. I think that's also an added advantage for that project relative to pipelines that are just pulling out of the Waha area.

Wanted to ask on M&A. I mean the company seems to do smaller tuck-ins. It seems maybe every couple of years or so. How important are acquisitions as part of the strategy from here? And is that part of what you want to accomplish over the next 5 years to try to further build out the platform? Or is that less of a priority because of all the organic growth you're seeing?

I think I view acquisitions in this environment that we're sitting and I think it speaks to the latter point that you just made as just bonus as extra. because the opportunities that we have to build organic projects and build these new infrastructure projects across the country are adding nicely to our bottom line to the extent that we can also execute on some acquisitions that are accretive to the company. I think it's just bonus. And we have had some really good opportunities here recently in the last 5 years to make some acquisitions that have made a ton of sense. As you know, we don't really compete well on acquisitions just from a cost of capital standpoint. So the acquisitions that we've achieved are those that have integrated into our system really well. The net Mexico acquisition in South Texas, the monument acquisition that we did this year in the Houston area that integrates into our Texas intrastate footprint, allowing us to serve our customers more efficiently, provide more options to our customers. those types of acquisitions are really nice because it's not eating into the balance sheet capacity because it comes with real-time cash flows. In most cases, the reason we are successful in those acquisitions is because we're able to add certain commercial synergies by combining our two systems. And so it's -- it gives us better opportunities to serve our existing customers and maybe serve the customers on the acquired assets more efficiently or more effectively.

Any last questions from the audience? Okay. Maybe we've talked a lot about projects and future growth. I mean, I don't want to overlook. The company has actually had a really great year performance-wise, you're well ahead of your budget. there's some kind of debate a little bit of how much of that is more onetime-ish based on market conditions this year and how much you see as repeatable into the future? How would you characterize that and the amount of outperformance this year?

We've had in the neighborhood of $225 million of kind of onetime nonrecurring business this year, and that's the FERC -- sorry, the Fern cold weather storm in the winter time, plus some extended cold period that we enjoyed in the Northeast area. We had some FERC retroactive billing relief, contract buyout in our terminals business, the Waha blow out -- the Waha basis spread blow out. Those are all -- what I would characterize as nonrecurring necessarily. I mean, some of those things like cold weather, you could see that from time to time. you could see basis points below out and the spreads blow out, especially in today's environment where these natural gas pipelines are full. And so if you have disruptions from period to period, in geographies, you have a great opportunity to see additional margin as a result of that. But as it relates to our actual outperformance this year, it's been about $225 million that we don't -- we wouldn't put into our budget for next year. Plus, we've had some commodity price benefits from the Iran war. We don't have a lot of exposure to commodity prices, but our budget was for $60 oil, and we've seen year-to-date average north of $80 per barrel. So a $20 per barrel swing, it makes an impact. And we estimated around $100 million for us. So kind of $325 million or so collectively, that some of that commodity price, we'll see what the forecast looks like next year. The rest of that outperformance, though has just been market conditions, and we think that those market conditions are largely contributing -- or should largely continue into next year. Our ability to generate additional margin on our Texas Intrastate business, our ability to recontract capacity on our interstate business at higher rates, greater volumes, provide additional services to our customers. I think those are the things that we should see continue into next year. We've had some additional outperformance on our CO2 volume side as well. I think Owen's a little bit more questionable whether or not that will continue into next year. But really good outperformance in that area, too.

Great. We'll leave it there. Thank you, David, for joining us for us.

Thank you.