Kinder Morgan Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2021

There are 14 speakers on the call.

Operator

Good afternoon. Thank you for standing by and welcome to the Quarterly Earnings Conference Call. Your lines have been placed on a listen only mode until the question and answer session of today's conference. Answer session. It is now my pleasure to turn the call over to Mr.

Operator

Rich Kinder, Executive Chairman of ask Kinder Morgan. Sir, you may begin.

Speaker 1

Thank you, Michelle. Before we begin, I'd like to remind you, as we always do, that KMI's earnings release today and this call answer session. Include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act answer session. Thank you. Thank you.

Speaker 1

Thank you. To read our full disclosures on forward looking statements and use of non GAAP financial measures set forth at the end of our earnings release, answer session. As well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause us answer is no longer a question. Now, every quarter, I open this call by talking about our financial philosophy at Kinder Morgan. I always mention strong and consistent cash flow answer session.

Speaker 1

And explain how we use that cash flow to play to pay a healthy and growing dividend, internally fund our expansion CapEx needs, answer session. Keep our balance sheet strong and opportunistically buy back our shares. I believe our shareholders understand and appreciate the strength of our cash answer is, even if there are very varied positions on what we should do with it. But in a broader sense, if we examine what owning a share answer KMI really amounts to, I've come to believe as the largest shareholder that we are receiving a very good and growing yield on our investment, answer While at the same time getting amazing optionality on future developments. Let me explain that optionality.

Speaker 1

Answer session. We have entered the energy transition field with what I consider to be solid investments that Steve and the team will discuss further and answer session. And our cash flow gives us the ability to pursue those opportunities in size if and only if the investments achieve a satisfactory return. Answer And I believe that if we so desire, we will be able to attract new partners at a time of our choosing, whether public or private, to participate in those answer is on terms favorable to KMI. I also firmly believe that there is still a long runway for fossil fuels around the world, answer session.

Speaker 1

Particularly for natural gas. If you read carefully the latest studies from the IEA, OPEC and from various other energy experts, answer session. You will see projections that fossil fuels will continue to supply the majority of our energy needs for at least the next quarter century answer session. And that natural gas will be at the forefront of fulfilling those needs. If these projections are anywhere close to accurate, answer session.

Speaker 1

Where we have substantial expertise and a huge network that can be expanded and extended. So this is another option that you receive as a KMI shareholder. I would add that the events of this fall throughout Europe, answer Asia and North America demonstrate that the transition to renewables is going to be a lot longer and more difficult answer session. J. Rice:] In short, while the world makes the transition, the lights need to stay on, answer comes from the line of John.

Speaker 1

Our answer session. We are now ready for questions. We are now ready for questions. Thank you. Thank you.

Speaker 1

Our next question comes from the line of John C. Murphy. Please go ahead. Thank you. Thank you.

Speaker 1

Answer That an investment in KMI provides you with a nice locked in return with its dividend and then provides really good optionality for the future. Answer With that, I'll turn it over to Steve.

Speaker 2

All right. Thanks, Rich. I'll give you an overview of our business and the current environment for our power sector as we see it. Then our President, will cover the outlook and segment updates. Our CFO, David Michaels, will take you through the financials and then we'll take your questions.

Speaker 2

Our financial principles remain the same. 1st, answer. Maintaining a strong balance sheet. A strong balance sheet helps us withstand setbacks and enables us to take advantage of opportunities. Over the last two years, we've We've seen both sides of that coin.

Speaker 2

Coming into 2020, we were better than our leverage target, and that helped us when we were hit with the pandemic related downturn. Answer Then this year, we saw the other side where our extra capacity created as a result of our outperformance in the Q1 answer gave us the ability to take advantage of 2 acquisition opportunities. We see both of those acquisitions as adding value to

Speaker 3

the firm. Answer session.

Speaker 2

2nd, we are maintaining our capital discipline through our elevated return criteria, a good track record of execution, and by answer Self funding our investments. We are also maintaining our cost discipline. We have always been lean, but last year at this time, we were completing an evaluation answer of how we were organized and how we could work even more efficiently. We implemented changes resulting in an estimated full year run rate answer session. Efficiencies of about $100,000,000 a year.

Speaker 2

In that effort, we were aiming for something beyond efficiency, greater effectiveness, and We can see that coming through in the functions we centralized under the leadership of our Chief Operating Officer, James Holland. Answer We are already seeing the benefits in project management and other functions. Finally, we are returning value to shareholders answer with the year over year dividend increase to a dollar 8 annualized, providing an increased but well covered dividend. Strong balance sheet, capital and cost discipline, answer is returning value to shareholders. Those are the principles we operate by, and we have done so regardless of what is in fashion at the moment.

Speaker 2

Answer We have accomplished some important work so far in 2021, which I believe will lead to long term distinction. First, we're having a record year financially attributable to our answer session. In the Q1, we've continued to execute well on our projects with our 2 intrastate gas group projects coming in ahead of schedule as noted in the press release. Answer And we have continued to find new opportunities with a small net increase in our backlog this quarter. 2nd, we completed the 2 important answer Acquisitions the larger one, Stagecoach, showing our confidence in the long term value of our natural gas business and taking our total operated storage capacity answer to 700 Bcf.

Speaker 2

We believe in the long term value of flexibility and deliverability in the gas business. That was demonstrated last winter. We are Seeing it with the recent tightening in the natural gas markets here and abroad and in our rates on storage renewals. 3rd, we've answer We continue to advance the ball on the ongoing evolution in energy markets and in our ESG performance. Answer As things stand today, 69% of our backlog is in support of low carbon infrastructure.

Speaker 2

That includes natural gas, of course, but answer It also includes $250,000,000 of organic projects supporting renewable diesel in our products and terminals business units and our renewable natural answer gas projects, repurposing and building assets at our current terminal locations to support the energy sources of the future. Importantly, answer That 69% is projected to come in at a weighted average answer of the expansion capital spend. So we're getting attractive returns on these investments. Further, our gas team has now concluded 3 answer. Responsibly sourced gas transactions.

Speaker 2

Those are low emissions along the chain from the producer through our transmission and storage business. Answer We'll soon be publishing our ESG report, including both scope 1 and scope 2 emissions. We have incorporated ESG reporting and risk management answer into our existing management processes and the report will explain how. In the meantime, Sustainalytics has us ranked number 1 in our sector answer for how we manage ESG risk and 2 other rating services have us in the top 10. This is increasingly a point of distinction answer comes from the line of John.

Speaker 2

With all of this, our projects, these commercial transactions, and our ESG G reporting and risk management, we continue to advance the ball on ESG and the evolution in energy markets without answer sacrificing returns. We continue to focus on the G governance in ESG as well. These things are all important to our long term success, answer session. And we have advanced the ball significantly on all 3 in 2021. We believe the winners in our sector will have strong balance sheets, answer is no longer a question.

Speaker 2

As always, we And with that, I'll turn it over to Ken.

Speaker 4

Okay. Thanks, Steve. So I'm going to start with the

Speaker 3

natural gas business unit for the quarter. Answer Transport volumes were up about 3% or approximately 1,100,000 dekatherms per day versus the Q3 of 'twenty. And that driven primarily by increased LNG deliveries and the PHP in service. And then those increases were somewhat offset by declines on our West due to the declining Rockies production, pipeline outages and contract expirations. Physical deliveries The LNG facilities off of our pipelines averaged 5,100,000 dekatherms per day.

Speaker 3

That's a 3,300,000 answer. Our answer. Share of deliveries to LNG facilities is approximately 50%. Exports to Mexico were down in the quarter when compared to The Q2 of 'twenty as a result of a new third party pipeline capacity added during the quarter. Overall, deliveries to power plants were down as you might answer comes

Speaker 4

from the

Speaker 5

higher natural gas prices.

Speaker 3

Our natural gas gathering volumes were down about 4% in the quarter compared to answer Q3 of 2020. But for gathering volumes, I think the more informative comparison is the sequential quarter. So compared to the second quarter of this year, volumes were up 5% with nice increases in the Eagle Ford and the Haynesville volumes, which were up 12% and answer is 8%, respectively. In our Products Pipeline segment, refined product volumes were up 12% for the quarter versus the 3rd answer. And compared to the pre pandemic levels, which we use the Q3 of 2019 as a reference answer point.

Speaker 3

Road fuels were down about 3% and jet fuel was down about 21%. You might remember that in the second quarter, road fuels were basically answer is flat versus the pre pandemic number. So we did see some impact of the Delta variant during the quarter. Crude and condensate volumes were down about 7 answer session. In our terminals answer business segment, our liquids utilization percentage remains high at 94%.

Speaker 3

If you exclude tanks out of service for required inspections, utilization is Approximately 97%. Our rack business, which serves consumer domestic demand, answer. Versus the Q3 of 'twenty, but they're down about 5% versus pre pandemic levels.

Speaker 4

Now if you exclude some lost business

Speaker 3

and a answer and a rack closure, so trying to get volumes on an apples to apples basis. Volumes on our rack terminal slightly exceeded pre pandemic levels. Answer Our hub facilities, in Houston and New York, which are more driven by refinery runs, international trade and blending dynamics, answer Have shown less recovery than our RAC terminals versus the pre pandemic levels. In our Marine tanker business, we continue to experience weakness. Answer.

Speaker 3

However, we've recently seen increased customer interest. On the bulk side, volumes were up 19%, so very nicely, answer is on an apples to apples comparison. But if you just look at coal, steel and pet coke on a combined basis, they're essentially flat answer session. To pre pandemic levels. In our CO2 segment, crude volumes were down about 6%, CO2 volumes were down about 5%, but answer.

Speaker 3

NGL volumes were up 7%. On price, we didn't see a benefit from the increasing crude price due to answer hedges we've put in place in prior periods when crude prices were lower. We do, however, expect to benefit from higher crude prices in future periods answer session. On our unhedged barrels and as we layer on additional hedges in the current price environment. We did see NGL price answer is to benefit in the quarter as we tend to hedge less of these volumes.

Speaker 3

Compared to our budget, we're currently anticipating that both oil volumes and answer and CO2 volumes will exceed budget as well as oil NGL and CO2 prices. Better oil production is primarily driven by reduced answer session. The decline in the base production and better project performance at Sacrock. So overall, we're seeing increased Natural gas transport volumes primarily from LNG exports, seeing increased gas gathering volumes in the Eagle Ford and the Haynesville on a sequential basis. Answer Product volumes are recovering versus 2020.

Speaker 3

However, road fuels were down about 3% versus pre pandemic levels answer versus flat with pre pandemic levels last quarter as we last likely saw an impact from the Delta variant.

Speaker 6

Answer is. Versus our

Speaker 3

budget CO2 crude oil production is outperforming and we're getting some nice help on price. Answer We're still experiencing weakness in our Jones Act tankers and the Bakken has been a little slower than we anticipated in bringing on new wells. Answer But our producer customers have indicated that they'll continue bringing on new production with some wells being pushed into 2020. Answer session. With that, I'll turn it over to David.

Speaker 7

Okay. Thanks, Kim. So for the Q3 of 2021, we're declaring a dividend of $0.27 per answer session. Which is $1.08 annualized and 3% up from the Q3 of last year. This quarter, we generated revenues of answer $3,800,000,000 up $905,000,000 from the Q3 of 2020.

Speaker 7

We had an associated increase in cost of sales with an increase there of $904,000,000 both of those increases driven by higher commodity prices versus last year. Our net income for the quarter was $495,000,000 up 9% from the Q3 of 'twenty, And our adjusted earnings per share was $0.22 up $0.01 from last year. Moving on to our segment and distributable cash flow performance. Our Natural Gas segment was up $8,000,000 for the quarter. Incremental contributions from Stagecoach and PHP were partially offset lower contributions from FEP where we've had contract expirations and lower usage and parking loan activity on our EP and G system.

Speaker 7

Answer The product segment was up $11,000,000 driven by continued refined product volume recovery, partially

Speaker 5

answer Offset by some lower crude volumes in the Bakken.

Speaker 7

Terminal segment was down $13,000,000 driven by weakness in our Jones Act Tanker business, partially offset by the continued refined product recovery volume excuse me, volume recovery we've seen there. Our G and A and corporate charges were higher by $28,000,000 due to lower capital spend resulting in less capitalized G and A this quarter versus answer session.

Speaker 1

Our

Speaker 7

answer session. Our JV DD and A was lower by $30,000,000 primarily due to lower contributions from Ruby Pipeline. Answer Interest expense is favorable, dollars 15,000,000 driven mostly by lower debt balance this year versus last. Our cash taxes answer Favorable $37,000,000 and that was due mostly due to 2020 payments of taxes that were answer session. Sustaining capital was unfavorable this quarter, dollars 64,000,000 driven by spending in our natural gas segment, answer session.

Speaker 7

And that's only slightly more than we budgeted for the quarter, though for the full year we expect to be about $65,000,000 higher than budget, answer with most of that variance coming in the Q4. Total DCF of $1,013,000,000 or $0.44 per share is down $0.04 answer comes from last year. Our full year guidance is consistent with what we provided last quarter with DCF at 5 point $4,000,000,000 and EBITDA at $7,900,000,000 Moving on to the balance sheet, we ended the quarter at 4.0x net debt to adjusted EBITDA answer And we expect to end the year at 4.0 times as well. This level benefits from the largely nonrecurring EBITDA generated during the Q1 during the winter storm Yuri event, and our long term leverage target of around 4.5 times has not changed. Our net debt ended the quarter at 31,600,000,000, down 424,000,000 from year end and up 1,423,000,000 from the end of the second answer session.

Speaker 7

To reconcile that change in net debt, for the quarter, we generated $1,013,000,000 of Bcf. We paid out dividends of $600,000,000 We closed the Stagecoach and Kinetrix acquisitions, which collectively were 1 $5,000,000,000 We spent $150,000,000 on growth CapEx and JV contributions, and we had a working capital use of 175 answer is that we have a very strong balance sheet. And that explains the majority of the change for the quarter. Answer. For the change from year end, we generated $4,367,000,000 of DCF, answer Paid out $1,800,000,000 of dividends.

Speaker 7

We spent $450,000,000 in growth CapEx and JV contributions. We had the $1,500,000,000 answer We have 413 come in on the NGPL sale and we've had a working capital use of $600,000,000 mostly interest expense payments. And that explains the majority of the change year to date. And that completes the financial review. Answer

Speaker 2

Okay. We'll open it up for questions now. And as we usually do, we'll ask you to limit your question to answer An initial question and one follow-up. And then if we have more, get back in the queue and we will get around to you. Michelle?

Operator

Answer session. One moment please for the first question. Shneur Gershuni from UBS. You may go ahead, sir.

Speaker 5

Hi. Good afternoon, everyone. Answer comes from the line of Andrew. Maybe to start off a little bit here. You've been very active the last few quarters on the acquisition and capital front with respect to and

Speaker 7

answer R and G, when

Speaker 5

it was diesel and so forth, sort of expanding on your energy transition plan. You've added to the backlog and so forth, answer. There have been fewer updates on the carbon capture side. A lot of companies and peers have made some major announcements recently, you know, hub models answer. On carbon capture and sequestration, is tender planning to pursue carbon capture as aggressively as some of these announcements answer we've seen.

Speaker 5

Just wondering if you could sort of give us an update on kind of the strategy you're approaching. You talked about some commercial arrangements last time. Just some broader thoughts answer session.

Speaker 2

Sure. Yes, we are involved in and pursuing carbon capture opportunities. I won't express those in terms of comparisons to others in the answer Announcements they've made. I want to be really clear about this. We view this as an attractive opportunity, but it will take some time to develop.

Speaker 2

And I think answer That's important to understand. The 45Q tax credits as they were finalized at the beginning of this year do make economic certain investments answer primarily related to capturing the flu stream off of ethanol facilities and gas processing facilities and primarily those in West Texas, Give you a few examples. One is you have to get the underground injection permits. That's a long drawn out process today that should get shortened up in Texas in particular. Answer In the legislature last time, they gave the Railroad Commission primacy on that.

Speaker 2

They have to go apply for that at EPA, but that'll shorten up the process from a 5 or 6 year answer process to something much more brisk, I would think. And then the other thing to think about is just the pipe itself. So answer The pipe, it's much more efficient, far more efficient to move CO2 in liquid form. That requires high pressure, special purpose pipe, which we have, 2,000 PSI through the pipe. That's not something that you can achieve with a repurposed oil or gas answer.

Speaker 2

Now we've looked at this, and we think it is for certain applications, particularly smaller volumes, shorter distances, there are answer Potentially some repurposed opportunities. I think the breakeven cutoff there is like $3.50 a day or less in order to make that more attractive. Answer But otherwise, you need some specialized facilities to move it efficiently and to inject it into the ground. And answer. And so we think we've got an advantage in that.

Speaker 2

Got to get the permitting shortened up, and we got to get customers who are nearby answer structure in the boat, if you will. But it's not a tomorrow thing. It's probably not a next year thing. It's something that's gonna answer session.

Speaker 5

Great. No, I appreciate the color there, Steve. Maybe it's for a follow-up answer session. Given the challenges with securing natural gas by many customers during the restructuring during the Q1, answer. You've got higher gas prices right now as well also.

Speaker 5

Are you seeing interested or actual contracting answer around your system, say in Haynesville or any of your pipeline and storage assets more broadly where we can see some potential growth where you sort of take this answer Spot environment that's pretty juicy right now and sort of converted to some longer term contracts?

Speaker 2

Yes. We have signed up some incremental business in Texas, and answer And we have also been able to particularly on our flexible storage, we have seen rate increases, pretty good rate increases because I think Everybody got a bit of a wake up call on the underlying value of storage, and we are working on additional incremental business. Answer We have talked publicly with regulators and others about a project that would add additional delivery capability in the state of Texas that answer Support more power and human needs loads even outside of what is really our current more active market area. Answer But we think, too, that we're seeing that really across the country that as things tighten up in these markets, People are putting value as they should, put value on firm deliverability. And let's face it, supply hasn't quite kept pace with demand, answer Particularly as export demand has grown, power demand has come off a little bit, as Kim mentioned, but it's fairly strong and industrial demand is strong, residential answer.

Speaker 2

Commercial is seasonal, but the demand has outstripped supply. And the producers are working on it, but it hasn't come back as fast as it came back, for example, when we merged out of the 2015, 2016 downturn. So, answer The value of deliverability, firm deliverability, as you get more intermittent resources in the generation stack, as people look at winter coming, answer As people look at the experience we just had, we think that that's going to be attractive. And answer And we're seeing that in real transactions.

Operator

Thank you. Our next answer comes from Spiro Dounis from Credit Suisse.

Speaker 8

Hey, good afternoon everybody. Steve, I asked you about answer Gas macro last time and didn't think I'd have to ask it again, but here we are at $5 to $6 gas. And so it seems like a lot's changed since August. So we'd just love answer session. Fresh thoughts on that front in terms of what you think it's going to take to kind of normalize prices here.

Speaker 8

To your point, we haven't really seen that supply response yet. What do you think that's going to take? What are producers answer is telling you they need to see and when. And then alternatively, Kim, you mentioned that some of the power plants have taken less deliveries because of the higher pricing. Is demand destruction something we need to worry about

Speaker 2

answer Okay. I'll start with the first one on the gas macro, and I'll call on Tom to I'll fill in on this here. As Kim mentioned, we are starting to see some sequential improvement sequential quarter, Q2 to Q3. And answer And there's been a lot more lively conversation, I think, with producers who are bringing some rigs in and starting to share some development plans. We've answer Some timing shifts in the Bakken, as Kim mentioned.

Speaker 2

But generally speaking, I think it's the case that producers are responding, but again, Not responding as quickly as they did in the last downturn. And as many have reported, you're seeing the publicly traded Quickly traded producers continue to be exceedingly disciplined about coming back in. They're enjoying the higher prices, but not responding as much answer I'd have a concern about capital discipline. However, I think something on the order of half of the rigs in the Permian now are owned by private players. Answer comes back whichever capital source drives it.

Speaker 2

It's just been coming back a little bit slower. Tom?

Speaker 9

Yes. I answer I think you covered it well.

Speaker 2

And then on the you want to talk about power demand and at current pricing?

Speaker 9

Yes. I mean, we have answer. Some degradation in power demand due to higher gas prices, but not as much as you would expect and certainly not what we have seen in prior years and a answer All that has to do with coal retirements and just the need answer Backfill renewable power on an intermittent basis. And so again, a slight decrease answer But not significant and we still see as Steve said power customers wanting to sign up

Speaker 5

answer session. Our next question comes from the line of Jefferies.

Speaker 9

Please go ahead. Hi, good morning. Hi, good morning. I'm

Speaker 5

answer comes through.

Speaker 8

Great. That's helpful color. Second one, just maybe getting your latest thoughts around capital spending going forward answer. Kind of on a multi year basis. Historically, you guys have talked about $2,000,000,000 to $3,000,000,000 spending in any given year.

Speaker 8

And then of course, with the pandemic and the slowdown, I think that fell to answer Sort of $1,000,000,000 or less was kind of the new number. But since then, we've seen the outlook kind of dramatically improve, especially when you consider a lot of the energy transition answer. In front of you that Rich mentioned earlier. And so just wondering, how do you think about an appropriate level of growth CapEx or M and A spending, however you want to think about it answer session. Going forward that sort of keeps you within your target leverage and also allows you to grow the dividend.

Speaker 2

Yes. So when we sort of adjusted answer The outlook from 2% to 3% to something lower. We adjusted it to 1% to 2%, and we still think that that's a pretty good answer is And this year, we ended up on the expansion capital front under $1,000,000,000 as you mentioned. So we were at about $800,000,000 for this year. Answer And, look, this is a function of kind of what kind of activity there is out there.

Speaker 2

A lot of the answer. Some of the new origination did come in the renewable diesel area and the renewable natural gas area as we talked about earlier, but we continue to have answer 53%, I think, of our backlog is for natural gas. And so we still think the 1% to 2% is about right. Answer session. I think it is 2 points here.

Speaker 2

1, really big mega projects, It's no secret to anybody. Those are harder to permit and build. But a lot on the other hand, a lot of the growth is on the Texas and Louisiana Gulf Coast, answer Growth in gas demand that we expect. And we're just starting to hear a little bit more from Permian players about the need for answer Another pipeline. They don't need it right now, but their time frame on when it might be needed out of the Permian has moved up a bit.

Speaker 2

And so those discussions aren't very advanced. Answer is just kind of a function of current prices in both crude and to some extent natural gas. Answer But really huge projects, I think, are probably not as likely to get done or permitted. And so we think the 1 to 2 is still probably about right, building off our existing network answer And

Speaker 1

let me just emphasize, as Steve said so many times, that we're going to be very disciplined in this approach to answer. Spending capital, make certain that these are satisfactory returns. And I agree with the kind of range Steve is talking about. But As we've explained, we have a lot of uses for our capital, and we're going to be very judicious about how we use it.

Speaker 5

Answer session.

Operator

Thank you. Our next question comes from Jeremy Tonet from JPMorgan. You may go ahead, sir.

Speaker 10

Hi, good afternoon.

Speaker 2

Answer session. Good afternoon.

Speaker 10

I want to touch on carbon capture a bit more here and just want to get your thoughts on how you think this can unfold. And do you think that answer The hub concept is really needed to kind of move forward efficiently kind of what the University of Houston and Rice in Columbia have discussed in their papers? Or do you think that standalone projects answer is on carbon capture can move forward by themselves.

Speaker 2

Well, we're exploring the standalone projects. I mean, we're open to discussing answer Other larger opportunities as well. And perhaps given that we know how to answer is Build, own, operate CO2 pipe, perhaps participating in the transport pieces. Answer But again, for all the reasons I said before, I think there's a lot of wood to chop before we see those bigger projects come through. Jesse, anything answer

Speaker 7

No, I agree. I think the standalone probably will be quicker because you just have multiple parties that have to come together on the hub concept.

Speaker 4

Answer. Got it. That's helpful there.

Speaker 10

And then as far as it relates to what Kinder could do going forward, do Do you see it mostly just organic growth off your footprint? Or do you see kind of the 2 projects that already have commercial backing and are moving forward That are servicing ethanol production in the CO2 outfit in the upper Midwest. Is that the type of thing that Kindred could get involved with or just kind of sticking to your own asset

Speaker 2

answer Again, carbon capture here. Yes. We've looked at some. And again, I just want to emphasize, look, I think carbon capture and sequestration, If we're going to meet climate objectives over the long term, it's going to have to be part of the picture. And some work is going to have to be done there.

Speaker 2

Answer But I'm just trying to set expectations at a rational level at how quickly we think that's likely to unfold and where we think the first projects get done. Answer And so there's a focus on our existing network, but we have had discussions with people off the network about the potential to capture and sequester carbon. Those things are Still in early stages, but there are things that we would explore if the returns were good.

Operator

Answer session. Thank you. Our next caller is Michael Blum from Wells Fargo. You may go ahead, sir.

Speaker 4

Thanks. Good afternoon, everyone. Answer session. I wanted to go back to, Rich, your opening comments. You referenced potentially, I think, private investors answer is Perhaps partnering with you to invest in the business.

Speaker 4

Can you just expand on that comment? Are you sort of suggesting public markets may or may not be there, so you might be looking at other sources of capital? Answer No.

Speaker 1

What I'm saying is that we think we are creating real value as we move toward critical mass answer In our Energy Transition Ventures Group. And at some point, at a time of our choosing, when we feel we have critical mass and still have significant growth answer is that we believe and the Board believes that we would have the opportunity to partner answer With public or private ownership on terms that we think would be very favorable to us. We think this is a platform answer That deserves and will receive a lot of investment interest when it gets

Speaker 4

to be the appropriate time. Answer Okay, got it. Thank you for that. Totally changing gears, I wanted to ask a little bit about the EOR business. Answer Just given the increase in oil prices, I guess, have you been able to lock in higher price hedges going forward?

Speaker 4

And are you thinking about that business any differently in terms of allocation of capital given the higher prices.

Speaker 7

Yes, we continue to layer on favorable hedges. Answer Last quarter, we've been able to really lift the back end of our hedge profile. So that's a positive. Answer We are seeing some organic growth within our existing assets as prices increase. So we think that will continue.

Speaker 5

Answer session.

Operator

And our next question comes from Tristan Richardson from Truist Securities. You may go ahead, sir.

Speaker 5

Answer. Hi, good afternoon. Just a follow-up on gas storage comments and to your commentary there on positive signs of renewals. Answer Could you just generally frame up for us where contracted capacity is today or relative to nameplate answer session. Is there more capacity available today for potential customers that, as you say, are waking up to the value proposition of gas storage?

Speaker 2

Answer Well, yes, you got to think of it in several buckets. I mean, one mentioned that if we got it under contract, we are looking at a storage answer session. Expansion opportunity, specifically in Texas. We have storage that's rolling off and renewing every year. We try to keep that fully under contract or answer We're pretty fully under contract as that happens.

Speaker 2

We're expecting well, we are seeing and we're expecting we'll continue to see answer Those values improve. But I want to make a further point about the bucketing here. Really flexible storage answer Like we have about 30 or 40 Bcf of that in our Texas intrastate business, Stagecoach is a pretty flexible storage asset as well. That's answer The value is really appreciating the most. If you think about some of our shorter term storage related services like park and loan in a backward answer market, there's not as much opportunity to park gas for customers.

Speaker 2

And so that shorter term business gets a little more limited. But and answer In the aggregate and in the overall outlook, storage is becoming more valuable in our judgment, and that's what made and we're seeing that. And And it's also what made the acquisition opportunity, which was somewhat fortuitous, but made it, attractive to us.

Speaker 5

Answer Helpful. Thanks, Steve. And then switching gears, a small piece of your business, but can you talk a little bit about the bulk business answer And bring closer back towards 2019 levels. Can you talk about just some of the dynamics we're seeing with all commodity inflation answer session. You see some of this backdrop as a tailwind for the bulk business, even on the pricing side or the capacity answer

Speaker 2

session. John Slosher. Sure. We've seen most of the growth in the coal area where we were up 40% on the quarter, In the steel area, we were up 38%, which kind of mirrors what you're seeing from an international standpoint. U.

Speaker 2

S. Production was up 39% and answer And exports were up 45%. We've been following along to that. We're back at our Pier 9 facility, which is where the predominance answer comes back to 2019 levels as we stand today.

Operator

Answer session. Our next caller is Keith Stanley from Wolfe Research. Sir, you may go ahead.

Speaker 11

Answer. Hi, good afternoon.

Speaker 12

So having closed the Connectrix deal now, can you just give an update on, I guess, the opportunities that you see in RNG and answer. Whether you think that'd be a significant part of your capital plan over the next several years either through acquisitions and or organic growth? Answer. And then relatedly, can you just talk to any progress or developments in the voluntary market that you're seeing as you try to term out RIN exposure there?

Speaker 2

Sure. Answer. So, Kinetrix, the 3 projects, as I believe Kim mentioned that they answer That came with the deal, if you will. Those were all under contract, under EPC contract, etcetera, at the time that we closed. That's been kicked off.

Speaker 2

Those are on track. In terms of the opportunity set, there are hundreds of landfill opportunities, but there are other competitive players out there. We think we bring some scale to that business. The returns are attractive. The capital commitment is $25,000,000 to $40,000,000 essentially per installation.

Speaker 2

Answer I guess what I'd say, Keith, is it's a little early to tell right now when and how much. We're keeping a very close eye on it. There's a lot of interest. There's shadow backlog, if you will, customer discussions underway on a significant number of additional answer Landfills, but there's work to be done commercially and all of that from here to there. But it's very economic, and answer session.

Speaker 2

And we've got some scale, we believe, to help commercialize this maybe more quickly than others. Answer So, optimistic, but hard to quantify the when and the yes, the when and the how much right now. The voluntary market, we have answer Good, real conversations with real counterparties who are interested in buying in the voluntary market. That means without the RINs value and without the answer volatility and but at very nice returns that are that would be locked in. And so answer.

Speaker 2

I think that market is real because of the ESG commitment and the net zero commitments that people are making. Their interest in doing answer Using renewable natural gas is strong, and so is the interest in the transport market. I mean, when you think about the answer is. Technological and economic barriers of electrifying heavy duty trucking, answer Compressed natural gas and even LNG is an attractive alternative that helps some of the big fleet operators meet their climate objectives and do so at answer comes from attractive prices. And the other thing I would mention is we sell our RINs answer Not quite exactly at the time we generate them, but we've pretty much sold our RINs inventory for the year and at prices that are better than what we have in the acquisition model.

Operator

Thank you. Our next caller is answer is Chase Mulvehill from Bank of America.

Speaker 6

Hey, good afternoon. I guess the first question is really around LNG. Answer. You've got 2 Bs a day coming online for LNG exports over the next 12 or 18 months answer Could you maybe walk through kind of how do you think this is going to impact your transport answer. And then if you're going to get some pull through on the G and P side, I know that you said you got about 50% market share.

Speaker 6

So should we expect about answer. Market share on the incremental 2Bs that come online over the next 12 to 18 months?

Speaker 9

Yes. I mean, so answer. We do have incremental projects that we're serving. We don't have contracts with both of those facilities, but we certainly answer Have a lot of business with Cheniere and as their capacity grows, we certainly have commitments to grow with them. Answer session.

Speaker 9

We do have other projects that we are in active discussions on projects that we believe will be answer FID probably sometime next year and we think we'll get our share of that capability as well and that answer is in our backlog right now.

Speaker 6

Okay, right. And then one follow-up, just sticking on the LNG theme and answer. And kind of thinking about LNG and responsibly sourced natural gas, are you having LNG operators request answer is. Responsible source natural gas is a feedstock. And today, is actually responsibly sourced natural gas getting a premium out there

Speaker 4

in the market answer

Speaker 2

The transactions that we've done, there hasn't been a premium to date, but I think the interest has really escalated here of late. And answer The LNG customers are interested in the overall carbon content of their cargoes, and that includes methane emissions. And answer And what they would tell you and what they've told us is sort of we're not their problem. Their problem is just making sure that they have producers who are using the right completion answer. But there is interest in that, particularly as they're trying to place cargoes in Europe and they're very focused on it.

Speaker 2

And we are working closely with them to make sure we do our part. But it is a very much a point of interest

Speaker 5

answer

Operator

session. Our next caller is Gabe Moren from Mizuho. You may go ahead, sir.

Speaker 5

Answer session. Hey, good

Speaker 4

afternoon, everyone. I'll only ask one because I know everyone wants to get to the Astra team. But answer Around the $64,000,000,000 emissions reductions project on the shift channel. I'm just curious kind of the evolution around that, whether that's answer The return on that project and also is that something I guess that's just specific to the HSE or can you take what you're doing there and apply it to some of answer Your other hubs as well, and is there interest in doing that? Yes.

Speaker 4

I mean, it's

Speaker 3

a project where, we've got existing answer Vapor combustion units and we're replacing those vapor combustion units with vapor recovery units. And so there is an economic return. Answer. The economic return comes from as we capture those papers, and answer. We can sell that product.

Speaker 3

And then the other, the vapor recovery unit is a little less intensive answer combustion and so there's natural gas savings. So there is an economic return associated with the lower answer Cost of running the equipment and with the volumes that we are covering. And that gets us to a nice We haven't counted anything in the returns for the emissions reduction, but we are going to get a 72% reduction and answer And the emissions from that facility on this project from this project.

Speaker 7

And answer. And Kim, maybe I

Speaker 4

can just ask a slight follow-up to that. Is the Board starting even to sort of put

Speaker 3

a price on CO2 sort of implicitly when you're discussing that project? Answer We have not put a price on CO2 when we're discussing projects. It is a answer. Non quantitative consideration, but the projects need to, on a quantitative basis need to clear the hurdles. Answer

Operator

session. Our next caller is Michael Lapides from Goldman Sachs. You may go ahead, sir.

Speaker 13

Answer. Hey, thanks all for taking my questions. I have 2. First of all, can you talk a little bit about timing for either the Permian or the Haynesville of when you might think answer. Either basin or what your customers are saying about when either basin would need new long haul capacity.

Speaker 13

That's question 1. Question 2, answer. Steel prices are through the roof, labor is up a good bit. How should we think about if new kind of larger pipelines are needed for 1 or 2 basins, answer What cost inflation means for kind of potential returns or potential tariff levels?

Speaker 2

Okay. Yes. I mean answer On the Permian takeaway, what we had talked about before is kind of the need being there in kind of 2025, answer session. And now that's probably at least based on some conversations with customers maybe moved up a year. Now Michael, I just want to point out answer Need and contract signatures can sometimes be 2 different things and occur at 2 different points in time.

Speaker 2

And so I think it's going to be answer We'll be having commercial discussions, and we'll see whether the real commitment demand is there. And answer We'll see how that plays out really probably over the next year or so. Tom, on the Haynesville in terms of the timing there?

Speaker 9

Yes. So there is answer is one project that is FID that will be in the market in 2023, so that will help relieve some takeaway pressure. And then answer We think there is a need for some expansion projects sometime in the same mid-twenty 25 to

Speaker 2

answer And then on your question on steel costs and the like, yes, answer. Yes, they have absolutely gone up. We were looking at some information on hot rolled coil, which is what goes into the pipe mill to make pipelines. Answer That's up 3x year over year. It's up 90% or so year to date.

Speaker 2

And but the thing about it is answer. There is capacity in the world market. And so we've got a current dislocation. And the view would be, and you see to the extent people are willing to quote forward, that it starts to come down. But in any answer is.

Speaker 2

We've been here before in terms of needing to protect us from escalation in steel prices. We've concluded in past projects answer. Sometimes we needed them, sometimes we didn't. But and the other thing we're doing really across the board on materials is when we're evaluating a project answer session. For approval, we make sure to ask if this has been updated for current equipment, materials and answer and steel prices so that we make sure that we get that priced into the deal.

Speaker 2

To your real question, don't think it is an obstacle to

Operator

answer. Our next caller is Colton Bean from Tudor, Pickering, Holt and Company. Answer, you may go

Speaker 4

ahead. Afternoon. So just looking at terminals, I think the release noted that the Jones Act fleet was a key driver of some of the softer margins answer.

Speaker 7

Do you think counterparties exercise any

Speaker 4

of those renewal options or do you expect mostly spot exposure as we look at 2022? And then answer Just a really good question. Should we expecting any additional idling to cut OpEx there?

Speaker 2

Okay. John? Yes. We don't expect any Additional idling. We were able to kind of weather the storm through COVID with no impact.

Speaker 2

It hit us this year like it hit the entire industry. Answer 25% of the capacity of roughly 45 vessels was idled at any given point this year. Answer We had 2 that have been idled all year and rough rule of thumb is $3,000,000 per quarter per vessel. We've been able to recontract all of the other vessels as the year gone has gone on or put them in spot for a short period of time Until we were able to get those re contracted. Our exposure, if you look kind of forward into 2022, is about 22% of the fleet days.

Speaker 4

Answer. Great. Appreciate the update. And then maybe switching gears here, just checking on a hydrogen, obviously a longer term opportunity, answer. We've seen a number of pilots and I think just this morning had a larger scale production announcement.

Speaker 4

So are you seeing any requests for blending on the transportation network as we look out a few years? Yes, sure.

Speaker 2

Answer session. Yes. We're having conversations with customers about that. It is, as you pointed out, it's still a bit of an economic challenge. That doesn't It doesn't mean it won't happen, but it does mean that you have to have something that will cover those economics, like the ability to pass it through to a retail customer in a utility context or something like that.

Speaker 2

Again, this is one of those things like CCUS that answer session. Presumably will be part of the solution over the long term, but we're still in the early innings on it right now with pilots and experiments and announcements, but not answer We don't have real concrete commercial activity at this point.

Operator

Answer session. Thank you. Our next caller is Sunil Soudal from Seaport Global Securities. You may go ahead, sir.

Speaker 11

Answer. Yes. Hi, good afternoon everybody and thanks for taking my question. So my first question was related to a clarification on your opening remarks. Answer.

Speaker 11

I think you mentioned that in

Speaker 4

the Bakken, the volume pickup has been somewhat slow. Did I hear that correctly? And if so, answer But

Speaker 11

in your mind changes that trend, obviously, the commodity strip is fairly strong looking forward?

Speaker 2

Yes. So I think that dynamic is changing answer In terms of producer plans to continue to add wells to our system, they're absolutely And the rigs are running and they are drilling and getting the work done. I think it was just that the connections were a little slow answer The wells to be put online were a little slower than what we had anticipated for the year. But it's still, and answer We think robust growth opportunity for those assets, both on the gas and the crude side.

Speaker 11

Got it. So it's just a matter of time. Answer. The second question is related to the volatility we've seen in the natural gas markets and the spreads, etcetera. I was just curious answer session.

Speaker 11

Has that kind of changed your view on the rupee pipeline? Obviously, some of the contracts that have rolled off and answer You're seeing the impact of this spreads widening on that pipeline? And how should we think about that asset going forward?

Speaker 2

Answer Yes, not particularly on Ruby. From time to time, there's some activity there depending on what's going with the pipelines answer What's going on operationally with the pipelines coming down from Canada, but no change in our outlook there and no change in our update answer Our view on Ruby, which is we are going to make as Kinder Morgan an answer. Economic decision for Kinder Morgan shareholders when the debt comes due.

Operator

Answer. At this time, I am showing no further questions.

Speaker 1

Well, thank you. Obviously, everybody wants to get off and watch that baseball game up in Boston. Answer session. Thank you very much.

Operator

And thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

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Earnings Conference Call
Kinder Morgan Q3 2021
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