Kinder Morgan Q3 2021 Earnings Report

Kinder Morgan EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.24
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $0.21

Kinder Morgan Revenue Results

• Actual Revenue: $3.82 billion
• Expected Revenue: $3.23 billion
• Beat/Miss: Beat by +$594.90 million
• YoY Revenue Growth: +31.00%

Kinder Morgan Announcement Details

• Quarter: Q3 2021
• Date: 10/19/2021
• Time: After Market Closes
• Conference Call Date: Tuesday, October 19, 2021
• Conference Call Time: 8:00PM ET

Kinder Morgan (NYSE:KMI) (NYSE: KMI) is a large energy infrastructure company that owns and operates an extensive network of pipelines and terminals across North America. Its core activities center on the transportation, storage and handling of energy products, including natural gas, natural gas liquids (NGLs), crude oil, refined petroleum products and carbon dioxide. The company’s assets include long-haul and gathering pipelines, storage facilities, and multi-modal terminals that serve producers, refiners, utilities and industrial customers.

Kinder Morgan’s operations deliver midstream services such as pipeline transportation, terminaling, storage and related logistics and maintenance. Its terminals support marine, rail and truck distribution, while pipeline assets move product between production basins, processing facilities, refineries and export points. The business model emphasizes infrastructure that facilitates reliable physical delivery and long-term commercial contracts with shippers and end-users.

The company was co-founded by Richard D. Kinder, who has played a prominent role in its executive leadership. Over time Kinder Morgan has expanded through a combination of organic project development and acquisitions to broaden its footprint and service offerings. The company primarily serves markets in the United States and Canada, operating assets that connect key production, refining and demand centers across the region.

Kinder Morgan Q3 2021 Earnings Call Transcript

Key Takeaways

• Consistent cash flow funds a growing dividend of $1.08 annualized, self-funded expansion, a strong balance sheet (4.0x net debt/EBITDA) and opportunistic share buybacks.
• Completed the Stagecoach and Kinetrix acquisitions, boosting operated storage to 700 Bcf, while 69% of backlog supports low-carbon projects in natural gas, renewable diesel and RNG at attractive returns.
• Natural gas transport volumes rose ~3% year-over-year and gathering volumes increased 5% sequentially, and tightening markets are elevating the value of storage and firm deliverability.
• Advancing ESG with three responsibly sourced gas deals, an upcoming report covering Scope 1 and 2 emissions, top sustainability rankings and pursuit of carbon capture under 45Q incentives.
• Maintained capital discipline with ~$800 M of expansion capex (1–2% of capitalization), $100 M of annual cost savings and unchanged full-year guidance of $5.4 B DCF and $7.9 B EBITDA.

Presentation

[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 questions-and-answer session of today's conference. At that time you may press star followed by number one to ask a question. Please unmute your phone to state your name and prompted. Today's conference is being recorded. If you have any objection, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Sir, you may begin.

[Rich Kinder, Executive Chairman at Kinder Morgan]

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 include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as well as certain non-GAAP financial measures.

[Rich Kinder, Executive Chairman at Kinder Morgan]

Before making any investment decisions, we strongly encourage 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, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Every quarter, I open this call by talking about our financial philosophy at Kinder Morgan.

[Rich Kinder, Executive Chairman at Kinder Morgan]

I always mention strong and consistent cash flow and explain how we use that cash flow to pay a healthy and growing dividend, internally fund our expansion CapEx needs, keep our balance sheet strong, and opportunistically buy back our shares. I believe our shareholders understand and appreciate the strength of our cash flow, even if there are varied positions on what we should do with it. In a broader sense, if we examine what owning a share of 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, while at the same time getting amazing optionality on future developments.

[Rich Kinder, Executive Chairman at Kinder Morgan]

Let me explain that optionality. We have entered the energy transition field with what I consider to be solid investments that Steve and the team will discuss further, and our cash flow gives us the ability to pursue those opportunities in size if and only if the investments achieve a satisfactory return. 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 opportunities with us on terms favorable to KMI. I also firmly believe that there is still a long runway for fossil fuels around the world, particularly for natural gas.

[Rich Kinder, Executive Chairman at Kinder Morgan]

If you read carefully the latest studies from the IEA, OPEC, and from various other energy experts, you will see projections that fossil fuels will continue to supply the majority of our energy needs for at least the next quarter-century, and that natural gas will be at the forefront of fulfilling those needs. If these projections are anywhere close to accurate, a company like Kinder Morgan with significant free cash flow will find significant opportunities to invest in this core business where we have substantial expertise and a huge network that can be expanded and extended.

[Rich Kinder, Executive Chairman at Kinder Morgan]

This is another option that you receive as a KMI shareholder. I would add that the events of this fall throughout Europe, Asia, and North America demonstrate that the transition to renewables is going to be a lot longer and more difficult than many of its proponents originally thought. In short, while the world makes the transition, the lights need to stay on, homes need to be heated, and our industrial production needs to be sustained.

[Rich Kinder, Executive Chairman at Kinder Morgan]

Finally, we always have the option of returning dollars to our shareholders through selective stock repurchases, in addition to the healthy return we are providing through our dividend. This is why I say 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. With that, I'll turn it over to Steve.

[Steve Kean, CEO at Kinder Morgan]

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. Our President, Kim Dang, will cover the outlook and segment updates. Our CFO, David Michels, will take you through the financials, and then we'll take some questions. Our financial principles remain the same. First, 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 seen both sides of that coin.

[Steve Kean, CEO at Kinder Morgan]

Coming into 2020, we were better than our leverage target, and that helped us when we were hit with the pandemic-related downturn. This year, we saw the other side, where our extra capacity, created as a result of our outperformance in the first quarter, gave us the ability to take advantage of two acquisition opportunities. We see both of those acquisitions as adding value to the firm. Second, we are maintaining our capital discipline through our elevated return criteria, a good track record of execution, and by self-funding our investments.

[Steve Kean, CEO at Kinder Morgan]

We are also maintaining our cost discipline. We have always been lean, but last year at this time, we were completing an evaluation of how we were organized and how we could work even more efficiently. We implemented changes resulting in an estimated full-year run rate efficiencies of about $100 million a year. 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.

[Steve Kean, CEO at Kinder Morgan]

We are already seeing the benefits in project management and other functions. We are returning value to shareholders with the year-over-year dividend increase to $1.08 annualized, providing an increase but well-covered dividend. Strong balance sheet, capital and cost discipline, 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.

[Steve Kean, CEO at Kinder Morgan]

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 outperformance in the first quarter. We've continued to execute well on our projects with our two interstate gas group projects coming in ahead of schedule, as noted in the press release. We have continued to find new opportunities with a small net increase in our backlog this quarter.

[Steve Kean, CEO at Kinder Morgan]

Second, we completed the two important 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 to 700 BCF. 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.

[Steve Kean, CEO at Kinder Morgan]

Third, we've continued to advance the ball on the ongoing evolution in energy markets and in our ESG performance. As things stand today, 69% of our backlog is in support of low carbon infrastructure. That includes natural gas, of course, but it also includes $250 million of organic projects supporting renewable diesel in our products and terminals business units, and our renewable natural gas projects.

[Steve Kean, CEO at Kinder Morgan]

Repurposing and building assets at our current terminal locations to support the energy sources of the future. Importantly, too, that 69% is projected to come in at a weighted average 3.6x EBITDA multiple of the expansion capital spend. We're getting attractive returns on these investments. Further, our gas team has now concluded three responsibly sourced gas transactions. Those are low emissions along the chain from the producer, through our transmission and storage business.

[Steve Kean, CEO at Kinder Morgan]

We'll soon be publishing our ESG report, including both scope one and scope two emissions. We have incorporated ESG reporting and risk management into our existing management processes. The report will explain how. In the meantime, Sustainalytics has us ranked number one in our sector for how we manage ESG risk, and two other rating services have us in the top 10. This is increasingly a point of distinction with our investors, our regulators, and our customers. With all of this, our projects, these commercial transactions, and our ESG reporting and risk management, we continue to advance the ball on ESG and the evolution in energy markets without sacrificing returns.

[Steve Kean, CEO at Kinder Morgan]

We continue to focus on the G, governance in ESG as well. These things are all important to our long-term success. We have advanced the ball significantly on all three in 2021. We believe the winners in our sector will have strong balance sheets, low-cost operations that are safe and environmentally sound, and the ability to get things done in difficult circumstances. As always, we will evolve to meet the challenges and opportunities. With that, I'll turn it over to Kim.

[Kim Dang, President at Kinder Morgan]

Okay, thanks, Steve. I'm going to start with the natural gas business unit for the quarter. Transport volumes were up about 3%, or approximately 1.1 million dekatherms per day versus the third quarter of 2020. That was driven primarily by increased LNG deliveries and the PHP in service. Some of those increases were somewhat offset by declines on our west pipes due to the declining Rockies production, pipeline outages, and contract expirations.

[Kim Dang, President at Kinder Morgan]

Physical deliveries to LNG facilities off of our pipelines averaged 5.1 million dekatherms per day. That's a 3.3 million dekatherm per day increase versus the third quarter of 2020, when there were a lot of canceled cargoes. Our market share of deliveries to LNG facilities is approximately 50%. Exports to Mexico were down in the quarter when compared to the second quarter of 2020 as a result of a new third-party pipeline capacity added during the quarter. Overall, deliveries to power plants were down, as you might expect with the higher natural gas prices.

[Kim Dang, President at Kinder Morgan]

Our natural gas gathering volumes were down about 4% in the quarter compared to the third quarter of 2020. For gathering volumes, I think the more informative comparison is the sequential quarter. 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 8% respectively. In our products pipeline segment, refined product volumes were up 12% for the quarter versus the third quarter of 2020.

[Kim Dang, President at Kinder Morgan]

Compared to the pre-pandemic levels, which we use the third quarter of 2019 as a reference point, 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 flat versus the pre-pandemic number. We did see some impact of the Delta variant during the quarter. Crude and condensate volumes were down about 7% in the quarter versus the third quarter of 2020, and sequentially, they were down about 4%. In our Terminals Business Segment, our liquids utilization percentage remained high at 94%.

[Kim Dang, President at Kinder Morgan]

If you exclude tanks out of service for required inspections, utilization is approximately 97%. Our rack business, which serves consumer domestic demand, are up nicely versus the third quarter of 2020, but they're down about 5% versus pre-pandemic levels. Now, if you exclude some lost business and a rack closure, so trying to get volumes on an apples-to-apples basis, volumes on our rack terminals slightly exceeded pre-pandemic levels.

[Kim Dang, President at Kinder Morgan]

Our hub facilities in Houston and New York, which are more driven by refinery runs, international trade, and blending dynamics, have shown less recovery than our rack terminals versus the pre-pandemic levels. In our marine tanker business, we continue to experience weakness. However, we've recently seen increased customer interest. On the bulk side, volumes were up 19%, so very nicely driven by coal, steel, and petcoke. Bulk volumes overall are still down about 3% versus 2019 on an apples-to-apples comparison.

[Kim Dang, President at Kinder Morgan]

If you just look at coal, steel, and petcoke on a combined basis, they're essentially flat to pre-pandemic levels. In our CO2 segment, crude volumes were down about 6%, CO2 volumes were down about 5%, but NGL volumes were up 7%. On price, we didn't see a benefit from the increase in crude price due to the hedges we put in place in prior periods when crude prices were lower. We do, however, expect to benefit from higher crude prices in future periods on our unhedged barrels and as we layer on additional hedges in the current price environment.

[Kim Dang, President at Kinder Morgan]

We did see NGL price benefit in the quarter as we tend to hedge less of these volumes. Compared to our budget, we're currently anticipating that both oil volumes and CO2 volumes will exceed budget, as well as oil, NGL, and CO2 prices. Better oil production is primarily driven by reduced decline in the base production and better project performance at SACROC. 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.

[Kim Dang, President at Kinder Morgan]

Product volumes are recovering versus 2020. However, road fuels were down about 3% versus pre-pandemic levels versus flat with pre-pandemic levels last quarter, as we likely saw an impact from the Delta variant. Versus our budget, CO2 crude oil production is outperforming, and we're getting some nice help on price. 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. Our producer customers have indicated that they'll continue bringing on new production, with some wells being pushed into 2020. With that, I'll turn it over to David.

[David Michels, CFO at Kinder Morgan]

Okay. Thanks, Kim. For the third quarter of 2021, we're declaring a dividend of $0.27 per share, which is $1.08 annualized and 3% up from the third quarter of last year. This quarter, we generated revenues of $3.8 billion, up $905 million from the third quarter of 2020. We had an associated increase in cost of sales with an increase there of $904 million. Both of those increases driven by higher commodity prices versus last year. Our net income for the quarter was $495 million, up 9% from the third quarter of 2020, and our adjusted earnings per share was $0.22, up $0.01 from last year.

[David Michels, CFO at Kinder Morgan]

Moving on to our segment and distributable cash flow performance. Our Natural Gas segment was up $8 million for the quarter. Incremental contributions from Stagecoach and PHP were partially offset by lower contributions from FEP, where we've had contract expirations and lower usage in park and loan activity on our EPNG system. The product segment was up $11 million, driven by continued refined product volume recovery, partially offset by some lower crude volumes in the Bakken.

[David Michels, CFO at Kinder Morgan]

Terminal segment was down $13 million, driven by weakness in our Jones Act tanker business, partially offset by the continued refined product volume recovery we've seen there. Our G&A and corporate charges were higher by $28 million due to lower capital spend, resulting in less capitalized G&A this quarter versus a year ago, as well as cost savings we experienced in 2020 as a result of the pandemic. Those are partially offset by cost savings we experienced this year due to our organizational efficiency efforts, as well as lower non-cash pension expenses this year versus last.

[David Michels, CFO at Kinder Morgan]

Our JV DD&A was lower by $30 million, primarily due to lower contributions from Ruby Pipeline. Interest expense was favorable, $15 million, driven mostly by lower debt balance this year versus last. Our cash taxes were favorable, $37 million. That was mostly due to 2020 payments of taxes that were deferred in the second quarter into the third quarter. The full-year cash taxes are expected to be just slightly unfavorable to 2020 and slightly favorable to our budget. Sustaining capital was unfavorable this quarter, $64 million, driven by spending in our natural gas segment.

[David Michels, CFO at Kinder Morgan]

That's only slightly more than we budgeted for the quarter, though for the full year, we expect to be about $65 million higher than budget, with most of that variance coming in the fourth quarter. Total DCF of $1.013 billion, or $0.44 per share, is down $0.04 from last year. Our full-year guidance is consistent with what we provided last quarter, with DCF at $5.4 billion and EBITDA at $7.9 billion. Moving on to the balance sheet. We ended the quarter at 4.0x net debt to adjusted EBITDA. We expect to end the year at 4.0x as well.

[David Michels, CFO at Kinder Morgan]

This level benefits from the largely non-recurring EBITDA generated during the first quarter during the Winter Storm Uri event. Our long-term leverage target of around 4.5x Has not changed. Our net debt ended the quarter at $31.6 billion, down $424 million from year-end and up $1.423 billion from the end of the second quarter. To reconcile that change in net debt for the quarter, we generated $1.013 billion of BCF. We paid out dividends of $600 million. We closed the Stagecoach and Kinetrex acquisitions, which collectively were $1.5 billion.

[David Michels, CFO at Kinder Morgan]

We spent $150 million on growth CapEx and JV contributions, we had a working capital use of $175 million, mostly interest expense payments in the quarter. That explains the majority of the change for the quarter. For the change from year-end, we generated $4.367 billion of BCF, paid out $1.8 billion of dividends. We spent $450 million in growth CapEx and JV contributions. We had the $1.5 billion Stagecoach and Kinetrex acquisitions. We had $413 come in on the NGPL sale. We've had a working capital use of $600 million, mostly interest expense payments. That explains the majority of the change year-to-date. That completes the financial review. Back to Steve.

[Steve Kean, CEO at Kinder Morgan]

Okay. We'll open it up for questions now. As we usually do, we'll ask you to limit your question to an initial question and 1 follow-up. If you have more, get back in the queue, and we will get around to you. Michelle.

[Operator]

Thank you, sir. At this time, if you do have any questions or comments, you may press star one. If you would like to withdraw your question, you may press star two. One moment please for the first question. Shneur Gershuni from UBS, you may go ahead, sir.

[Shneur Gershuni, Analyst at UBS]

Hi, good afternoon, everyone.

[Steve Kean, CEO at Kinder Morgan]

Yeah.

[Shneur Gershuni, Analyst at UBS]

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 RNG, renewable diesel, and so forth, sort of expanding on your energy transition plan. You've added to the backlog and so forth. There have been fewer updates on the carbon capture side. A lot of companies and peers have made some major announcements recently, hub models on carbon capture and sequestration.

[Shneur Gershuni, Analyst at UBS]

Is Kinder planning to pursue carbon capture as aggressively as some of these announcements we've seen? 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 into that.

[Steve Kean, CEO at Kinder Morgan]

Sure. Yes, we are involved in and pursuing carbon capture opportunities. I won't express those in terms of comparisons to others and the 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, and I think that's important to understand. The 45Q tax credits as they were finalized at the beginning of this year do make economic certain investments primarily related to capturing the flue stream off of ethanol facilities and gas processing facilities, and primarily those in West Texas, which are adjacent to our existing CO2 infrastructure.

[Steve Kean, CEO at Kinder Morgan]

There are some things to work through here, and let me 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. In the legislature last time, they gave the Railroad Commission primacy on that. They have to go apply for that at EPA. That'll shorten up the process from a five or six year process to something much more brisk, I would think. The other thing to think about is just the pipe itself. The pipe it's much more efficient, far more efficient to move CO2 in liquid form.

[Steve Kean, CEO at Kinder Morgan]

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 pipe. We've looked at this, and we think it is for certain applications, particularly smaller volume, shorter distances, there are potentially some repurposed opportunities. I think the break-even cutoff there is like 350 a day or less in order to make that more attractive.

[Steve Kean, CEO at Kinder Morgan]

Otherwise you need some specialized facilities to move it efficiently and to inject it into the ground. We think we've got an advantage in that. Got to get the permitting shortened up, and we got to get customers who are nearby our infrastructure in the boat, if you will. It's not a tomorrow thing. It's probably not a next year thing. It's something that's going to take a little bit of time to develop, but we are in active conversations.

[Shneur Gershuni, Analyst at UBS]

Great. No, appreciate the color there, Steve. Maybe for a follow-up question. Given the challenges with securing natural gas by many customers during Winter Storm Uri during the first quarter, you've got higher gas prices right now as well also. Are you seeing interest in more actual contracting activity 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 spot environment that's pretty juicy right now and sort of convert it to some longer-term contracts?

[Steve Kean, CEO at Kinder Morgan]

Yeah, we have signed up some incremental business in Texas, 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. We are working on additional incremental business. We have talked publicly with regulators and others about a project that would add additional delivery capability in the state of Texas that would help support more power and human needs loads even outside of what is really our current more active market area.

[Steve Kean, CEO at Kinder Morgan]

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. Let's face it, supply hasn't quite kept pace with demand, particularly as export demand has grown. Power demand's come off a little bit, as Kim mentioned, but it's fairly strong. Industrial demand is strong. Residential commercial is seasonal.

[Steve Kean, CEO at Kinder Morgan]

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 emerged out of the 2015, 2016 downturn. The value of deliverability, firm deliverability, as you get more intermittent resources in the generation stack, as people look at winter coming, as people look at the experience we just had, we think that that's going to be attractive. We're seeing that at real transactions.

[Operator]

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

[Spiro Dounis, Analyst at Credit Suisse]

Hey, good afternoon, everybody. Steve, I asked you about gas macro last time and didn't think I'd have to ask you again, but here we are at $5-$6 gas, and so seems like a lot's changed since August. Would just love refresh thoughts on that front in terms of what you think it's going to take to kind of normalize prices here. To your point, we haven't really seen that supply response yet. What do you think that's going to take? What are producers telling you they need to see and when? 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 at these price levels?

[Steve Kean, CEO at Kinder Morgan]

Okay. We'll start with the first one on the gas macro. I'll call on Tom to fill in on this here. As Kim mentioned, we are starting to see some sequential improvement, sequential quarter, Q2-Q3. 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 had some timing shifts in the Bakken, as Kim mentioned. Generally speaking, I think it's the case that producers are responding, again, not responding as quickly as they did in the last downturn.

[Steve Kean, CEO at Kinder Morgan]

As many have reported, you're seeing the publicly traded producers continue to be exceedingly disciplined about coming back in. They're enjoying the higher prices, not responding as much out of their concern about capital discipline. I think something on the order of half of the rigs in the Permian now are owned by private players, the supply will come back, whichever capital source drives it. It's just been coming back a little bit slower. Tom?

[Tom Martin, President of Natural Gas Segment at Kinder Morgan]

Yeah, I think you covered it well.

[Steve Kean, CEO at Kinder Morgan]

Okay. Then you want to talk about power demand at current pricing?

[Tom Martin, President of Natural Gas Segment at Kinder Morgan]

Yeah. We have seen 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. A lot of that has to do with coal retirements and just the need to backfill renewable power on an intermittent basis. Again, a slight decrease, but not significant. We still see, as Steve said, power customers wanting to sign up for services to firm up their gas-fired power capabilities on a longer-term basis. I think that all looks good for the future.

[Spiro Dounis, Analyst at Credit Suisse]

Great. That's helpful color. Second one, just maybe getting your latest thoughts around capital spending going forward kind of on a multi-year basis. Historically, you guys had talked about $2 billion-$3 billion spending in any given year. Then, of course, with the pandemic and the slowdown, I think that fell to sort of $1 billion or less was kind of the new number.

[Spiro Dounis, Analyst at Credit Suisse]

Since then, we've seen the outlook kind of dramatically improve, especially when you consider a lot of the energy transition opportunities in front of you that Rich mentioned earlier. Just wondering, how do you think about an appropriate level of growth CapEx or M&A spending, however you want to think about it, going forward that sort of keeps you within your target leverage and also allows you to grow the dividend?

[Steve Kean, CEO at Kinder Morgan]

Yeah. When we sort of adjusted the outlook from $2 billion-$3 billion to something lower, we adjusted it to $1 billion-$2 billion, and we still think that that's a pretty good estimate. This year, we ended up on the expansion capital front under $1 billion, as you mentioned. We were at about $800 million for this year. Look, this is a function of kind of what kind of activity there is out there. Some of the new origination did come in the renewable diesel area and the renewable natural gas area, as we talked about earlier. We continue to have 53%, I think, of our backlog is for natural gas.

[Steve Kean, CEO at Kinder Morgan]

We still think the $1 billion-$2 billion is about right. I think it is two points here. One, really big mega projects, it's no secret to anybody, those are harder to permit and build. On the other hand, a lot of the growth is on the Texas and Louisiana Gulf Coast, the 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 another pipeline.

[Steve Kean, CEO at Kinder Morgan]

They don't need it right now, but their timeframe on when it might be needed out of the Permian has moved up a bit. Those discussions aren't very advanced. It's just kind of a function of current prices in both crude and to some extent, natural gas. Really huge projects, I think are probably not as likely to get done or permitted. We think the $1 billion-$2 billion is still probably about right, building off our existing network at attractive returns.

[Rich Kinder, Executive Chairman at Kinder Morgan]

Let me just emphasize, as Steve said so many times, that we're going to be very disciplined in this approach to spending capital, make certain that these are satisfactory returns. I agree with the kind of range Steve is talking about. 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.

[Operator]

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

[Jeremy Tonet, Analyst at JPMorgan]

Hi, good afternoon.

[Steve Kean, CEO at Kinder Morgan]

Good afternoon.

[Jeremy Tonet, Analyst at JPMorgan]

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

[Steve Kean, CEO at Kinder Morgan]

Well, we're exploring the standalone projects. I mean, we're open to discussing other larger opportunities as well. Perhaps, given that we know how to build, own, operate CO2 pipe, perhaps participating in the transport pieces. 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 you want to add there?

[Jesse Arenivas, VP and President of CO2 at Kinder Morgan]

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.

[Jeremy Tonet, Analyst at JPMorgan]

Got it. That's helpful there. As far as it relates to what Kinder could do going forward, do you see it mostly just organic growth off your footprint, or do you see the two projects that already have commercial backing and are moving forward that are servicing ethanol production in the CO2 offset in the upper Midwest? Is that the type of thing that Kinder could get involved with or just kind of sticking to your own asset base?

[Steve Kean, CEO at Kinder Morgan]

Again, on carbon capture here?

[Jeremy Tonet, Analyst at JPMorgan]

Yeah.

[Steve Kean, CEO at Kinder Morgan]

Yeah, 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, is going to have to be part of the picture. Some work is going to have to be done there. 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. 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 they are things that we would explore if the returns were good.

[Operator]

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

[Michael Blum, Analyst at Wells Fargo]

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

[Rich Kinder, Executive Chairman at Kinder Morgan]

No, what I'm saying is that we think we are creating real value as we move toward critical mass in our energy transition ventures group. At some point, at a time of our choosing, when we feel we have critical mass and still have significant growth opportunities, which we think are there in spades, then I was saying that we believe and the board believes that we would have the opportunity to partner with public or private ownership on terms that we think would be very favorable to us. We think this is a platform that deserves and will receive a lot of investment interest when it gets to be the appropriate time.

[Michael Blum, Analyst at Wells Fargo]

Okay, got it. Thank you for that. Totally changing gears. Wanted to ask a little bit about the EOR business. Just given the increase in oil prices, I guess, have you been able to lock in higher price hedges going forward, and are you thinking about that business any differently in terms of allocation of capital given the higher prices?

[Steve Kean, CEO at Kinder Morgan]

Jesse?

[Jesse Arenivas, VP and President of CO2 at Kinder Morgan]

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

[Operator]

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

[Tristan Richardson, Analyst at Truist Securities]

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

[Steve Kean, CEO at Kinder Morgan]

Well, yeah, 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 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 pretty fully under contract. As that happens, well, we are seeing and we're expecting we'll continue to see those values improve. I want to make a further point about the bucketing here. Really flexible storage, like we have about 30 BCF or 40 BCF of that in our Texas intrastate business. Stagecoach is a pretty flexible storage asset as well.

[Steve Kean, CEO at Kinder Morgan]

That's where 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 dated market, there's not as much opportunity to park gas for customers. That shorter-term business gets a little more limited. In the aggregate and in the overall outlook, storage is becoming more valuable in our judgment. We're seeing that, and it's also what made the acquisition opportunity, which was somewhat fortuitous, but made it attractive to us.

[Tristan Richardson, Analyst at Truist Securities]

Helpful. Thanks, Steven. Then switching gears, a small piece of your business, but can you talk a little bit about the bulk business getting closer back towards 2019 levels? Can you talk about just some of the dynamics we're seeing with bulk commodity inflation and supply dislocation? Do you see some of this backdrop as a pop tailwind for the bulk business, either on the pricing side or the capacity utilization side?

[Steve Kean, CEO at Kinder Morgan]

John Schlosser?

[John Schlosser, President of Terminals at Kinder Morgan]

Sure. We've seen most of the growth in the coal area where we were up 40% on the quarter, and in the steel area we were up 38%, which kind of mirrors what you're seeing from an international standpoint. U.S. production was up 39% and exports were up 45%. We've been following along to that. We're back at our Pier IX facility, which is where the predominance of our export business is on the coal, back to 2019 levels as we stand today.

[Operator]

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

[Keith Stanley, Analyst at Wolfe Research]

Hi, good afternoon. Having closed the Kinetrex Energy deal now, can you just give an update on, I guess, the opportunity set you see in RNG and 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? 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?

[Steve Kean, CEO at Kinder Morgan]

Sure. Kinetrex Energy, the three projects as I believe Kim mentioned that came with the deal, if you will, those were all under contract, under EPC contract, etc, at the time that we closed. That's been kicked off. 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 million-$40 million essentially per installation.

[Steve Kean, CEO at Kinder Morgan]

I guess what I'd say, Keith, is it's a little early to tell right now when and how much, okay? 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 landfills. There's work to be done commercially and all of that from here to there. It's very economic and we've got some scale, we believe, to help commercialize this maybe more quickly than others. Optimistic but hard to quantify the when and the how much right now.

[Steve Kean, CEO at Kinder Morgan]

The voluntary market, we have good real conversations with real counterparties who are interested in buying in the voluntary market. That means without the RINs value and without the RINs volatility, but at very nice returns that would be locked in. I think that market is real because of the ESG commitment and the net zero commitments that people are making. Their interest in using renewable natural gas is strong. Is the interest in the transport market.

[Steve Kean, CEO at Kinder Morgan]

When you think about the technological and economic barriers of electrifying heavy duty trucking, 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 attractive prices. The other thing I would mention is we sell our RINs 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 had in the acquisition model.

[Operator]

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

[Chase Mulvehill, Analyst at Bank of America]

Hey, good afternoon. I guess the first question is really around LNG. You've got the two Bs a day coming online for LNG exports over the next 12 or 18 months with Calcasieu Pass. Could you maybe walk through how do you think this is going to impact your transport volumes? If you're going to get some pull through on the G&P side, I know that you said you got about 50% market share, should we expect about 50% market share on the incremental two Bs that come online over the next 12-18 months?

[Steve Kean, CEO at Kinder Morgan]

Tom?

[Tom Martin, President of Natural Gas Segment at Kinder Morgan]

We do have incremental projects that we're serving. We don't have contracts with both of those facilities, we certainly have a lot of business with Cheniere. As their capacity grows, we certainly have commitments to grow with them. We do have other projects that we are in active discussions on projects that we believe will be FID probably sometime next year, we think we'll get our share of that capability as well. That isn't in our backlog right now.

[Chase Mulvehill, Analyst at Bank of America]

Okay. Right. One follow-up, just sticking on the LNG theme, and thinking about LNG and responsibly sourced natural gas. Are you having LNG operators request responsibly sourced natural gas as a feedstock? Today is actually responsibly sourced natural gas getting a premium out there in the market today?

[Steve Kean, CEO at Kinder Morgan]

Yeah. 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. The LNG customers are interested in the overall carbon content of their cargoes, and that includes methane emissions. What they would tell you, and what they've told us is sort of we're not their problem.

[Steve Kean, CEO at Kinder Morgan]

Their problem is just making sure that they have producers who are using the right completion techniques, etc. There is interest in that, particularly as they're trying to place cargoes in Europe, and they're very focused on it, and we are working closely with them to make sure we do our part. It is very much a point of interest with our LNG customers.

[Operator]

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

[Gabe Moreen, Analyst at Mizuho]

Hey, good afternoon, everyone. I'll only ask one because I know everyone wants to get to the Astros game. Around the $64 million emissions reductions project on the Ship Channel, I'm just curious, kind of the evolution around that, whether there's going to be a return on that project. Is that something, I guess, that's just specific to the HSC, or can you take what you're doing there and apply it to some of your other hubs as well? Is there interest in doing that?

[Kim Dang, President at Kinder Morgan]

Yeah. It's a project where we've got existing vapor combustion units, and we're replacing those vapor combustion units with vapor recovery units. There is an economic return. The economic return comes from as we capture those vapors, then we can sell that product. Then the other, the vapor recovery unit is a little less intensive than vapor combustion, so there's natural gas savings.

[Kim Dang, President at Kinder Morgan]

There is an economic return associated with the lower cost of running the equipment and with the volumes that we are recovering. That gets us to a nice economic return. We haven't counted anything in the returns for the emissions reduction, we are going to get a 72% reduction in the emissions from that facility on this project, from this project.

[Gabe Moreen, Analyst at Mizuho]

Kim, maybe I can just ask as a slight follow-up to that. Is the board starting even to sort of put a price on CO2 sort of implicitly when you're discussing a project?

[Kim Dang, President at Kinder Morgan]

We have not put a price on CO2 when we're discussing projects. It is a non-quantitative consideration, but the projects, on a quantitative basis, need to clear the hurdle.

[Operator]

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

[Michael Lapides, Analyst at Goldman Sachs]

Hey, thanks y'all for taking my questions. I have two. First of all, can you talk a little bit about timing for either the Permian or the Haynesville, of when you might think either basin or what your customers are saying about when either basin would need new long-haul capacity? That's question one. Question two, steel prices are through the roof. Labor's up a good bit. How should we think about if new kind of larger pipelines are needed for one or two basins, what cost inflation means for potential returns or potential tariff levels?

[Steve Kean, CEO at Kinder Morgan]

Okay. Yeah. On the Permian takeaway, what we had talked about before is kind of the need being there in kind of 2025, call it. 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 need and contract signatures can sometimes be two different things and occur at two different points in time. So I think we'll be having commercial discussions, and we'll see whether the real commitment demand is there. 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?

[Tom Martin, President of Natural Gas Segment at Kinder Morgan]

Yeah. There is one project that is FID that will be in the market in 2023, so that'll help relieve some takeaway pressure. We think there is a need for some expansion projects sometime in the same mid-2025-2028 timeframe for additional BCF or so.

[Steve Kean, CEO at Kinder Morgan]

On your question on steel costs and the like, yeah, 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. That is up 3x year-over-year. It is up 90% or so year-to-date. But the thing about it is that there is capacity in the world market, and so we have got a current dislocation. The view would be, and you see to the extent people are willing to quote forward, that it starts to come down.

[Steve Kean, CEO at Kinder Morgan]

But in any case, we have been here before in terms of needing to protect us from escalation in steel prices. We have included in past projects steel trackers. Sometimes we needed them, sometimes we did not. The other thing we're doing really across the board on materials is when we're evaluating a project for approval, we make sure to ask, has this been updated for current equipment, materials, and steel prices so that we make sure that we get that priced into the deal.

[Operator]

Thank you. Our next caller is Colton Bean from Tudor, Pickering, Holt and Company. Sir, you may go ahead.

[Colton Bean, Analyst at Tudor, Pickering, Holt and Company]

Afternoon, sir. Just looking at terminals, I think the release noted that the Jones Act fleet was a key driver of some of the softer margins there. Are you seeing counterparties exercise any of those renewal options, or do you expect mostly spot exposure as we look at 2022? Just a related question, should we be expecting any additional idling to cut OpEx there?

[Steve Kean, CEO at Kinder Morgan]

Okay. John?

[John Schlosser, President of Terminals at Kinder Morgan]

We don't expect any additional idling. We were able to kind of weather the storm through COVID with no impact. It hit us this year like it hit the entire industry. 25% of the capacity of roughly 45 vessels was idled at any given point this year. We had two that had been idled all year, and rough rule of thumb is $3 million per quarter per vessel. We've been able to recontract all of the other vessels as the year has gone on, or put them in spots for a short period of time until we were able to get those recontracted. Our exposure, if you look kind of forward into 2022, is about 22% of the fleet days.

[Colton Bean, Analyst at Tudor, Pickering, Holt and Company]

Great. Appreciate that update. Maybe switching gears here, just checking on hydrogen. Obviously a longer-term opportunity, but we've seen a number of pilots and I think just this morning had a larger scale production announcement. Are you seeing any requests for blending on the transportation network as we look out a few years?

[Steve Kean, CEO at Kinder Morgan]

We're having conversations with customers about that. It is, as you point out, it's still a bit of an economic challenge. That 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. Again, this is one of those things like CCUS that 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 we don't have real concrete commercial activity at this point.

[Operator]

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

[Sunil Sibal, Analyst at Seaport Global Securities]

Yeah. Hi, good afternoon, everybody, and thanks for taking my question. My first question was related to a clarification on your opening remarks. I think you mentioned that in the Bakken, the volume pickup has been somewhat slow. Did I hear that correctly? If so, what in your mind changes that trend? Obviously the commodity strip is fairly strong looking forward.

[Steve Kean, CEO at Kinder Morgan]

Yeah. I think that dynamic is changing. In terms of producer plans to continue to add wells to our system, they're absolutely doing that, 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, or the wells to be put online were a little slower than what we had anticipated for the year. It's still, we think, robust growth opportunity for those assets, both on the gas and the crude side.

[Sunil Sibal, Analyst at Seaport Global Securities]

Got it, just a matter of time.

[Steve Kean, CEO at Kinder Morgan]

Yes.

[Sunil Sibal, Analyst at Seaport Global Securities]

The second question is related to the volatility we've seen in the natural gas markets and the spreads, etc. I was just curious, has that kind of changed your view on the Ruby Pipeline? Obviously, some of the contracts there have rolled off, and I was curious if you're seeing the impact of this spreads widening on that pipeline, and how should we think about that asset going forward?

[Steve Kean, CEO at Kinder Morgan]

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

[Operator]

Sir, at this time, I am showing no further questions.

[Rich Kinder, Executive Chairman at Kinder Morgan]

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

[Operator]

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

Participants

Executives

• David Michels, CFO
• Jesse Arenivas, VP and President of CO2
• John Schlosser, President of Terminals
• Kim Dang, President
• Rich Kinder, Executive Chairman
• Steve Kean, CEO
• Tom Martin, President of Natural Gas Segment

Analysts

• Chase Mulvehill, Analyst at Bank of America
• Colton Bean, Analyst at Tudor, Pickering, Holt and Company
• Gabe Moreen, Analyst at Mizuho
• Jeremy Tonet, Analyst at JPMorgan
• Keith Stanley, Analyst at Wolfe Research
• Michael Blum, Analyst at Wells Fargo
• Michael Lapides, Analyst at Goldman Sachs
• Shneur Gershuni, Analyst at UBS
• Spiro Dounis, Analyst at Credit Suisse
• Sunil Sibal, Analyst at Seaport Global Securities
• Tristan Richardson, Analyst at Truist Securities