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

Great. Good morning, everyone, and sorry for the technical difficulties. Welcome to the RBC Midstream & Energy Infrastructure Conference. I'm Elvira Scotto, one of RBC's U.S. midstream analyst. So our next fireside is with Kinder Morgan. And we're happy to have with us today, Kim Dang, Kinder Morgan's President. So I'll start with some questions. [Operator Instructions] As you can see, the slides are uploaded and also available on Kinder Morgan's Investor Relations website. So with that, welcome, Kim, and thank you for presenting today.

Let me start with a big macro question. What is Kinder Morgan's longer-term view of natural gas demand, given the increased focus on carbon emissions globally?

Sure. I think from our perspective, and there are a lot of different forecasts out there, Elvira, and I'm sure you've seen every single one of them, but we think that natural gas demand will continue to grow for decades to come. And the reason we believe that is because it's cheap, abundant, reliable and has fairly low emissions. And so whether you look at the EIA forecast or you look at WoodMac or even if you look at the IEA's stated policy scenario in all of those forecasts, natural gas demand continues to grow. And there's a couple of reasons for that. One is it is a very good backup to wind and solar. And so there's -- we've got -- and we've got this slide up on the website. But we've got a very good example from the recent California blackouts. And so their -- California, I think about 30% of their electricity comes from renewables. And so they had a huge heat wave that hit California. And so demand increased by about 20%. And when that happened, there was also cloud cover. And so solar capacity or solar deliverability decreased by about 25%, and wind power decreased by about 58%. And so -- and the other thing that happens on renewables is that solar peaks in sort of the middle of the day and starts to decline at the exact time when the demand starts to increase, and then it peaks later in the evening. And so you've got a mismatch between solar supply and the demand. And so as a result of a mismatch and the variability in being able to provide power from renewables, natural gas can step in and provide the backstop. And so in California, what you saw was an 84% increase in natural gas generation in order to backstop the renewables. So it serves as a valuable backstop to allow the renewable load to be in place. The second thing is there's a lot of people in our world that are still in poverty. And China and India are trying to bring a huge percentage of their population out of poverty, and they're not going to be able to do that using more expensive renewable or solar power, solar or wind. And so I think that our best strategy in the U.S. in order to reduce CO2 emissions is to try to get them to provide that power to their country using natural gas. And we've got the infrastructure in place to be able to do that very cheaply and provide them a reliable source of power. I think the other thing that gets lost in the equation is there's almost 4 million people per year on -- in this world that die as a result of air pollution, from things like indoor cooking, cooking with wood and dung and being able to provide those people with a cleaner source of fuel, I think, is very important. And so I think a lot of times, when we have the discussion about renewables, the intermittency of them, and the poverty and trying to bring people out of poverty, that gets lost. So I'm not saying that renewables don't grow. I think there is absolutely a place for renewables. And -- but I think it's hard to believe when we look at the IEA sustainable development scenario, that we get any close to those levels, given the cost to get there, given the reliability issues and also given -- and this doesn't get talked about much, but the greenhouse gas footprint that comes with solar and wind plus battery. There's a three- to tenfold greater tonnage of raw inputs required for the clean technology versus natural gas. You're talking about cobalt from the Congo. You're talking about lithium from cartel-controlled mines in Mexico. And then you've got to deal with the recycle issues on the back end, where worn-out solar panels, that could double today's plastic waste. And then you're going to have potentially tons of toxic batteries. So for those reasons, I think it's hard for us to believe that you get anywhere close to those others. And that's why we believe that natural gas will continue to be -- continue to grow for decades to come.

Great. Thanks for that informative answer, Kim. We're fresh off the election. How do you think a Biden administration can affect oil and gas production in the U.S. and permitting for new pipeline projects?

Sure. On the oil and gas side, I think it's likely that new drilling on federal lands is more difficult. I think that's the best case, and I think that it could be [indiscernible], meaning that they don't issue permits. So I think they either make it very difficult to get permits on federal lands, or they don't issue new permits on it. From that perspective, I think because demand is going to continue to be there, I think what you'll see is a decrease of volumes coming off of those federal lands, which are primarily in New Mexico, Permian, to some extent in the Bakken and in the Rockies. But the Rockies is largely outside of the DJ Basin. And there'll be offsets to those volumes. And the incremental volumes will come out of the Haynesville, potentially some out of the Eagle Ford and potentially some out of DJ and the Northeast. On the pipeline side, I think what we're likely to see is that FERC is going to require a greenhouse gas analysis around getting new permits for pipelines. I think there's also other analysis that they could require in terms of cumulative impact, some other things. That is likely going to slow the process to get permits. I also think it could mean fewer projects getting approved. But on the other hand, when you think about the need for large-scale interstate natural gas pipelines, I don't see a huge need for those at this point in time. I think the only place that really needs a large-scale interstate natural gas pipeline at this point is in the Northeast. And I think many people have tried there even in a more favorable FERC environment and proven that, that can't get done. So I also don't think there's as much need in the current [ environment ].

Great, Kim. So I wanted to switch over to capital allocation. Can you talk about your capital allocation philosophy? Given the pandemic-related demand destruction, would you consider a lower leverage target? How do you evaluate share repurchase versus dividend growth? [Technical Difficulty] I think we're having some technical difficulties. We're trying to get them sorted out. Apologies for that. Yes. Kim, maybe do you want to just... [Technical Difficulty] Okay. Sorry again for the technical difficulties. Kim, I wanted to switch over to capital allocation. Can you talk about your capital allocation philosophy? Given the pandemic-related demand destruction, would you consider a lower leverage target? And then how do you evaluate share repurchase versus dividend growth?

Sure. I think we're comfortable with our target leverage at 4.5x, and some that remains unchanged. And believe it's appropriate for a couple of different reasons. One, the size, scale and diversity of our business, our customer credit quality. The fact that we're self-funding all of our CapEx and our dividend, and we feel like that, that 4.5x and the resulting rating that we have access to capital even in distressed markets. And when we look at the benefit of going lower than 4.5, down to 4, which is, I think, where we would need to be to get an upgrade, there's a huge amount of capital to do that, about -- a little under $800 million for every 0.1x. And so you're approaching $8 billion to get to BBB+, and there's a limited benefit to your cost of capital from doing that. And so for all of those reasons, we think that the 4.5x is appropriate and is unchanged. In terms of returning capital, share repurchase versus dividend growth, it's a balancing act, and there's a lot of judgment involved. And I think -- when we think about the general considerations, both are good methods of returning excess cash to shareholders. The dividend deliver more value directly to the shareholder and, therefore, I think, are very highly valued. But they also create a long-term fixed payment obligation for us, which reduces flexibility. So the share repurchase is an indirect method of returning capital to our shareholders, but it obviously gives us more flexibility. And so when we think the company-specific factors that we think about, we are committed to paying a healthy, well-covered dividend to our shareholders and increasing that dividend over time. Our stock's currently yielding 7.5% plus. And when you look at that and the distribution of yields in the S&P 500, we're in the 95th-plus percentile of S&P 500 companies. And share repurchases are attractive at current prices, although not as attractive as they were a week or 2 ago. So I think the Board's going to be thoughtful and deliberate as we make a decision around the fourth quarter and around the dividend for 2021, but it's a balancing act. And there is a lot of judgment.

We do have a question that's come in from the audience. What's the status of PHP? When should we expect it online? And is there any more risk of delays?

Yes. And so right now, we're in the process of commissioning PHP. And what that involves, when you're commissioning PHP, is it involves starting up compressor stations. And you're starting to hydrotest. You're moving -- actually, you're loading the pipe with gas, and then you're starting to move the gas through the pipe. And so you're looking at the integrity of the pipe. And generally, that's around the wells to make sure that the wells have integrity, and then you're making sure that there aren't any problems with the compressor stations and those running. And so it's a process. And so I think at this point, the only thing that could get in the way would be if we found significant problems with compressor stations or if we found problems with wells, a significant number of wells that had to be cut out.

Great. I wanted to get to energy transition. I know on your third quarter earnings call, you mentioned some initiatives that Kinder Morgan could undertake to participate in energy transition, including carbon capture and storage and the potential transport of hydrogen. Can you provide a little more detail around these initiatives, and where you actually stand in the process of these initiatives?