Kinder Morgan Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

There are 20 speakers on the call.

Operator

Welcome to the Quarterly Earnings Conference Call. Today's call is being recorded. If you have any objections, you may disconnect at this time. All participants are in a listen only mode until the question and answer portion of today's call. I would now like to turn the call over to Mr.

Operator

Rich Kinder, Executive Chairman of Kinder Morgan.

Speaker 1

Thank you, Jordan. And as I always do before we begin, I'd like to remind you 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. Before making any investment decisions, We strongly encourage you to read our full disclosure 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, which may cause actual results to differ materially from those anticipated and described in such forward looking statements. Let me start by saying that in these turbulent and volatile times, it seems to me that every public company owes its investors a clear explanation of its strategy and its financial philosophy. In these days, Platitudes and unsubstantiated hockey stick growth projections don't play well.

Speaker 1

To my way of thinking, despite the pronouncements of celebrities, Fortune may not favor the brave so much as it favors the cash. The ability to produce sizable amounts of cash from operations Should be viewed as a real positive in picking investments, but I believe that generating cash is only part of the story. The rest is dependent on how that cash is utilized. At Kinder Morgan, we consistently produce solid and growing cash flow and we demonstrated that once again this quarter. At the Board and the management level, we spend a lot of time and effort deciding how to deploy that cash.

Speaker 1

As I've said ad nauseam, our goals are to maintain a strong investment grade balance sheet, fund expansion and acquisition opportunities, Pay a handsome and growing dividend and further reward our shareholders by repurchasing our shares on an opportunistic basis. As Steve and the team will explain in detail, we used our funds for all those purposes in the Q2. To further clarify our way of thinking, We approve new capital projects only when we are assured that these projects will yield a return well in excess of our weighted cost of capital. Obviously, in the case of new pipeline projects, most of the return is normally based on long term throughput contracts, which we are able to negotiate prior to the start of construction. But we also look at the long term horizon and we're pretty conservative in assumptions on renewal contracts After expiration of the base term and on the terminal value of the investment.

Speaker 1

That said, we are finding good opportunities to grow our pipeline network As demonstrated by our recent announcement of the expansion of our Permian Highway Pipeline, which will enable additional natural gas To be transported out of the Permian Basin. So if we're generating lots of cash and using it in productive ways, why isn't that reflected at a higher price For KMI stock, or to use that old phrase, if you're so smart, why aren't you rich? In my judgment, market pricing has disconnected From the fundamentals of the Midstream Energy business, resulting in a KMI yield dividend yield approaching 7%, Which seems ludicrous for a company with the stable assets of Kinder Morgan and the robust coverage of our dividend. I don't have an answer for this disconnect. And it's easy to blame factors over which we have no control, like the mistaken belief that energy companies have no future Or the volatility of crude prices, which in fact have a relatively small impact on our financial performance.

Speaker 1

Specific to KMI, some of you may prefer that we adopt a swing for the fences philosophy rather than our balanced approach, While others may think we should be even more conservative than we are, to paraphrase Abe Lincoln, I know we can't please all of you all the time, But I can assure you that this Board and management team are firmly committed to return value to our shareholders and that we will be as transparent as possible And explaining our story to you and to all of our constituents. Steve?

Speaker 2

We're having a good year. We're projecting to be nicely above plan for the year And substantially better year over year Q2 to Q2 as Kim and David will tell you. Some of the outperformance is Commodity price tailwinds, but we're also up on commercial and operational performance. And here are some highlights. Our capacity sales and renewals In our gas business are strong.

Speaker 2

Gathering and processing is also strong, up versus plan and up year over year. Existing capacity is growing in value. I'll give you an example. After years of talking about the impact of contract rollouts, we're now seeing value growth In many places across our network. One recent example, on our Mid Continent Express pipeline, we recently completed an open season where we awarded a Substantial chunk of capacity at maximum rates.

Speaker 2

Those rates are above our original project rate. While not super material to our overall results, I think it's a stark and good illustration of the broader trend of rate and term improvements on many of our renewals In the natural gas business unit. 2nd, in CO2, sacrod production is well above plan and of course we are benefiting from higher commodity prices in this segment. The product segment is ahead of plan and terminals is right on plan. We're facing some cost headwinds, mostly because of added work this year.

Speaker 2

While costs are up, we're actually doing very well in holding back the impacts of inflation. It's hard to measure precisely, but based on our analysis, we are well below The headline PPI numbers that you're seeing and actually we appear to be experiencing less than half of those increases. That's due to much good work By our procurement and operations teams and much of this good performance is attributable to our culture, we are frugal with our investors' money. A few comments on capital allocation. The order of operations remains the same as it has been for years.

Speaker 2

First, a strong balance sheet. We expect to end this year a bit better than our 4.5x debt to EBITDA target, giving us capacity to take advantage of opportunities and protect us from risk. As we noted at our Investor Day this year, having that capacity is valuable to our equity owners. 2nd, we invest in attractive to add to the value of the firm. We have found some incremental opportunities and expect to invest about $1,500,000,000 this year in expansion capital.

Speaker 2

And notably, we added an expansion of our Permian Highway pipeline. We picked up Mas Energy, that's MAS, a Renewable Natural Gas Company, And we're close on a couple of more nice additions to our renewable natural gas business. We are finding these opportunities and others All at attractive returns well above our cost of capital. Finally, we return the excess cash In the form of a growing well covered dividend and share repurchases. So far this year, we have purchased about 16 point 1,000,000,000 shares while raising the dividend 3% year over year.

Speaker 2

As we look ahead, we have a $2,100,000,000 backlog, 75% of which is in low carbon energy services. That's natural gas, RNG as well as renewable associated feedstocks in our Products and Terminals segment. Again, all of these are attractive returns. And I want to emphasize, as we've said, I think many times now, our investments in the energy transition businesses we have done without sacrificing our return criteria, a nice accomplishment. In natural gas, in particular, we are focused on continuing to be the provider of choice for the growing LNG market, Where we expect to maintain and even expand on potentially our 50% share and in natural gas storage, Which is highly cost effective energy storage in a market that will continue to need more flexibility.

Speaker 2

Again, we are having a very good year. We are further strengthening our balance sheet, finding excellent investment opportunities and returning value to shareholders. And we are setting ourselves up well for the future. Yes.

Speaker 3

Thanks, Steve. Starting with the natural gas business segment for the quarter. Transport volumes were down about 2%. That's approximately 600,000 dekatherms per day versus the Q2 of 2021. That was driven primarily by reduced volumes Mexico, as a result of 3rd party pipeline capacity added to the market, pipeline outage on EP and G And continued decline in the Rockies production.

Speaker 3

These declines were partially offset by higher LNG deliveries and higher power demand. Deliveries to LNG facilities off of our pipelines averaged approximately 5,800,000 dekatherms per day, That's 16% higher than the Q2 of 2021, but lower than the Q1 of this year due to the Freeport LNG outage. Our current market share of deliveries to LNG facilities remains around 50%. We currently have about 7 Bcf a day of LNGP gas contracted on our pipes. And we've got another 2.6 Bcf a day of highly likely contracts where projects have been FID but not yet built or where we expect them to FID in the near term.

Speaker 3

We're also working on a significant amount of other potential projects. And given the proximity of our assets to the planned LNG expansions, We expect to maintain or grow that market share as we pursue those opportunities. Deliveries to power plants in the quarter were robust, Up about 7% versus the Q2 of 2021. The overall demand for natural gas is very strong. And as Steve said, that drives nice demand for our transport and storage services.

Speaker 3

For the future, we continue to anticipate Growth in LNG exports, power, industrial and exports to Mexico. For LNG demand, our internal And WoodMac numbers project between 11 Bcf a day of LNG demand growth by 2028. Our natural gas gathering volumes in the quarter were up 12% compared to the Q2 of 2021. Sequentially, volumes were up 6% With a big increase in the Haynesville volumes, up 15% and Eagle Ford volumes, up 10%. These increases were somewhat offset by lower volumes Overall, our gathering volumes in the natural gas segment were budgeted to increase by 10% for the full year And we're currently on track to exceed that number.

Speaker 3

In our product pipeline segment, refined product volumes were down 2% For the quarter versus the Q2 of 2021, gasoline and diesel were down 3% 11%, respectively. But we did see a 19% increase in jet fuel demand. For July, we started the month down versus 2021 on refined products, But we have seen gasoline prices decrease nicely over the last month or so. Crude and condensate volumes were down 6 percent in the quarter versus the Q1 of 2021. Sequential volumes were down 2% with the reduction in the Bakken volumes More than offsetting an increase in the Eagle Ford.

Speaker 3

In our Terminals business segment, our liquids utilization percentage remains high 91%, excluding tanks out of service for required inspections, utilization is approximately 94% And liquid throughput during the quarter was up 4% driven by gasoline, diesel and renewables. We have seen some rate weakness On renewal, the contract renewals in our hub terminal impacted by the backwardation in the market, just like we saw some marginal benefit You know when the curve was in a contango position a couple of years ago. Although we were hurt in the quarter by lower average rates on our marine tankers, All 16 vessels are currently sailing under firm contracts and rates are now at pre COVID levels. On the bulk side, overall volumes increased by 1%, driven by pet coke and coal and that was somewhat offset by lower steel volume. In the CO2 segment, crude NGL and CO2 volumes were down compared to Q2 of 2021, but that was more than offset By higher commodity prices.

Speaker 3

Versus our budget, crude, NGL and CO2 volumes, as well as price on all of these commodities, are all expected to exceed our expectations. Overall, we had a very nice first half of the year. We currently project that we will exceed our full year 2020 plan DCF and EBITDA by 5%, and we've approved a number of nice new projects including the PHP expansion and Evangeline Pass Phase 1. With that, I'll turn it over to Dave and Michael.

Speaker 4

Thank you, Kim. For the Q2 of 2022, we're declaring a dividend of $0.2775 per share, which is $1.11 per share annualized, up 3% from our 2021 dividend. And one highlight before we begin the financial performance As Steve mentioned, we took advantage of a low stock price by tapping our board approved share repurchase program. Year to date, we've repurchased 16,100,000 shares for $17.09 Per share. We believe those repurchases will generate an attractive return for our shareholders.

Speaker 4

Our savings from the current dividends Alone without regard to terminal value assumptions or dividend growth in the future is 6.5%, a nice return to our shareholders. Moving on to the Q2 financial performance. We generated revenues of $5,150,000,000 up $2,000,000,000 from the Q2 of 2021. Our associated cost of sales also increased by $1,700,000,000 Combining those two items, our gross margin was $254,000,000 higher this quarter versus a year ago. Our net income was $635,000,000 up from a net loss of $757,000,000 in the Q2 of last year, But that includes a non cash impairment item for 2021.

Speaker 4

Our adjusted earnings, which excludes certain items, Including that non cash impairment was $621,000,000 this quarter, up 20% From the adjusted earnings in the Q2 of 2021. As for our DCF performance, each of our business units Generated higher EBITDA than the Q2 of last year. Natural Gas segment was up $69,000,000 With greater contributions from Stagecoach, which we acquired in July of last year, greater volumes through our Kinderhook system, favorable commodity price impacts On our Altamon and Cocono South Texas systems and those are partially offset by lower contributions from CIG. The product segment was up $6,000,000 driven by favorable price impacts, partially offset by lower crude volumes on Highland and HH as well as higher integrity costs. Our terminals segment was up $7,000,000 with greater contributions from expansion projects placed in service, A gain on a sale of an idled facility and greater coal and petco volumes.

Speaker 4

Those are partially offset by lower contributions from our New York Harbor terminals And our Jones Act Tanker business versus the Q2 of last year. Our CO2 segment was up $60,000,000 driven by favorable commodity prices more than Setting lower year over year oil and CO2 volumes as well as some higher operating costs. Also adding to that segment were contributions from our Energy Transition Ventures, Renewable Natural Gas Business, Connectrix, which we acquired in August of last year. The DCF in total was $1,176,000,000 15% over the Q2 of 2021 and Our DCF per share was $0.52 up 16% from last year. It's a very nice performance.

Speaker 4

Onto our balance sheet, we ended the 2nd quarter with $31,000,000,000 of net debt and a net debt to adjusted EBITDA ratio of 4.3 times. That's up from year end at 3.9 times, although that 3.9 times includes The non recurring EBITDA contributions from the winter storm Yuri event in February of 2021, the ratio at year end would have Then 4.6 times excluding the Yuri EBITDA contributions. So we ended the quarter favorable to our year end recurring metric. Our net debt has decreased $185,000,000 year to date, and I will reconcile that change to the end of the second quarter. We've generated year to date DCF of $2,631,000,000 We've paid out dividends of $1,200,000,000 We've spent $500,000,000 on growth capital and contributions to our joint ventures.

Speaker 4

We've posted about $300,000,000 of margin related to hedging activity. Through the Q2, we had $170,000,000 of stock And we've had approximately $300,000,000 of working capital uses year to date, and that explains the majority of the Year to date net debt change. And with that, I'll turn it back to Steve.

Speaker 2

All right. Thank you. So we'll open up to the Q and A part of the session. And as a reminder, as we've been doing, we ask you to limit your questions to one question and one follow-up. And then if you've got more, get back in the queue and we will get to you.

Speaker 2

And here in the room, we have a good portion of our management team. And as you ask your questions, I'll let you hear directly from them on Your question about questions about their businesses. So Jordan, you would open up the Q and A.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Jeremy Tonet from JPMorgan. Your line is open.

Speaker 5

Hi, good afternoon.

Speaker 2

Good afternoon.

Speaker 5

So I guess, Bitcoin shouldn't be on the high on the list for organic growth projects anytime soon, I'm taking But moving on to the Permian, just want to see as far as takeaway is concerned, what's your latest look there as far as when tightness could Materialize and at the same time with GCX, just wondering if what it takes to reach FID there. If the basin is Tight. Then could this be a near term event?

Speaker 6

Tom? Yes. So I think with the projects, Including ours that have been FID and are proceeding in the construction mode that there may be a near term Tightness, but once those projects go into service, we feel like the market is pretty well served until The latter part of the decade. So I think the next projects will likely come in. So need to be FIT sometime in 2024, maybe 2025.

Speaker 6

And there still may be opportunities in the near term for GCX. We are in several discussions with a lot of additional customers there for Pockets of capacity, especially to serve LNG markets, but I think for now, I think the markets at least on a Near term to intermediate term, pretty well served.

Speaker 2

And GCX is fast to market. It has a compression expansion. The FIT is in In the middle part of the decade or 27 months to complete that life.

Speaker 5

Got it. So just want to confirm there Back half a decade next pipe you said there as far as beyond what's currently out there?

Speaker 6

That sounds right.

Speaker 7

Got

Speaker 5

it. And real quick, just on the renewable natural gas. Just wanted to see if you could provide more details on the acquisition here from us, Can Am. As far as the economics, what type of renewable credits were kind of baked in their expectations? And should we expect kind of more Acquisitions of this nature going forward, is this an area that's ripe for consolidation for Kinder to go after?

Speaker 5

Just wondering broader thoughts there.

Speaker 8

Anthony? Yes. So, the acquisition, we're excited about it. It's 3 landfill 1 RNG facility in Arlington, and that's the bulk of the value here, dollars 355,000,000 We have 2 medium BTU facility in Shreveport in Victoria as well. It is a little bit different from the Connectrix deal.

Speaker 8

It's Because it's an operating asset that's largely derisked. Arlington has favorable royalty arrangements in place, Long term contract into the transportation market, so there's RIN exposed here. And the longer long term EBITDA multiple here is around 8 times. Okay. And the Here is around 8 times.

Speaker 2

Okay. And the prospects for additional?

Speaker 8

Yes. And so I think Steve mentioned, we have line of sight For some additional growth, there are some opportunities on an M and A side, but I think largely, we'll be looking to Grow organically in the future.

Speaker 5

Got it. That's helpful. Thank you.

Speaker 2

And you're right, Jeremy. Bitcoin is not even in the shadow backlog.

Speaker 5

Didn't think so. Thank you.

Operator

Our next question comes from Jean Ann Salisbury with Bernstein. Your line is open.

Speaker 9

Hi. Have your operations had to adjust for the Freeport outage? Can you talk about if you're seeing more flows into Louisiana or Mexico or getting By Texas weather, or you just kind of not getting paid from some of it if they did force measure?

Speaker 6

Yes. So, I would say fairly immaterial financial impact to us. But as far as an impact to the market, We're certainly seeing the basis market in the Katy Ship Channel area weekend with the additional volumes that are Hitting the Texas market, I think it helps support storage, Gulf Coast storage more broadly, but certainly Has been at least partially offset by the extreme power demand that we've been seeing here in Texas and along The Gulf Coast and I would say just with the connectivity with the interstate pipeline grid between in trials and interstates, those volumes are getting pretty well dispersed.

Speaker 9

Great. Thank you. And then my second question is very long term. I'm getting asked about this from generalists and want to make sure I'm getting it right. Just kind of want to understand refined product pipes, the common concern that I'm hearing.

Speaker 9

If we play out an energy transition scenario, We're flowing them and 15 years is much lower than today, let's say. Can you talk about what would happen to the pipe revenue for refined product pipes? Is it Mostly cost of service days or negotiated or some of

Speaker 10

those? Yes, Dax? Yes, I guess I would say, first of all, It depends on where sort of where it happens. I mean, I think from an economic protection perspective, we have the ability To we've got rate making protection on the pipes to be able to take into account decreased volumes, the increased rates to be able To protect us. And so I think the place that's probably been most progressive on this has been California with The conversation about potentially banning the internal combustion engine, but if you look at that, really what that gets to is Road fuel is consumed in the state of California.

Speaker 10

And we obviously transport a lot of products out of there to other states. And we did an analysis And that came to about 11% of products EBITDA on a 2019 basis. So if you look at the place that's probably the most progressive on it, that's really kind of what you're looking at from our segments perspective. And that's before you put in place, tariff protection. So that's the way we look at it.

Speaker 2

Yes. So Jean Ann, there's a bit of a contrast here between How things work on the products pipeline and for example, how things work on the natural gas pipelines. We do tend to do a lot of negotiated rate transactions on The natural gas, the pipeline grid, in the regulated interstate, well, even intrastate refined products pipelines, Those are typically those are they are cost of service regulated common carrier pipelines. We just recently settled, a significant rate case, a long Running rate case on our SFPP system. We have an ongoing one on the intrastate in the CPUC business.

Speaker 2

But if you think about these Pipes economically, they really are the cheapest and best way to move the product from point A to point B. And so there is good Strength in their market position. And so yes, if there was a decrease in volume, you would go in and you'd say I have lower volume units, I'm Spreading the same cost of service over a lower number of barrels and I want a rate increase. That's not how we run the railroad and that's not something that we've had to do with the one exception of the California intrastate market. And but it is a bit of a different dynamic between Refined Products Pipelines and the Natural Gas Pipelines.

Speaker 3

We can move renewable diesel Through our pipes, so to the extent that gets replaced, renewable diesel can go through. And also, sustainable aviation fuel, could be moved through our pipes as well, so those were replacement products.

Speaker 9

Great. That was very helpful. Thank you for the thorough answer. That's all for me.

Operator

Our next question comes from Colton Bean with Tudor, Pickering, Holt and Co. Your line is open.

Speaker 11

Good afternoon. On the guidance increase, it looks like an EBITDA step up of $350,000,000 or better. I guess, first, are there any offsets at the cash flow level That result in DCF also being 5% or is that just a function of rounding? And then second, I think you all had flagged about $750,000,000 of discretionary cash on

Speaker 5

the original budget. Should we assume

Speaker 11

the guidance increase is additive to that total, including the $100,000,000 bump in CapEx last quarter?

Speaker 4

The offsets or the items that are unfavorable between EBITDA and DCF for us are Interest expense and sustaining capital. Interest expense versus our budget is just up because short term rates are Meaningfully above what we had budgeted and the longer term rates are also up a little bit. And then the sustaining capital, we have some incremental Class change costs that we had that we didn't budget for and a little bit of inflation costs, increasing our sustaining capital. In terms of the available capacity that we talked about at the beginning of the year, the $750,000,000 was based on available capacity Given our budgeted EBITDA and assumed spend for the year, our EBITDA is up nicely. So that's increased the available balance sheet capacity that we have.

Speaker 4

But we've also spent we're also increasing our spend a little bit more than what we had budgeted given the Moss transaction. We have a couple of additional projects And our discretionary spend that Steve talked about, and we've repurchased some shares that weren't in our budget. So, overall, our available capacity is still higher than what we had budgeted, but we've also spent A fair amount, more than what we have budgeted as well.

Speaker 11

Great. And then David, maybe just sticking on the financing side of things. I think you all have noted that you had locked in roughly $5,000,000,000 of your floating rate exposure through the end of this year. Any updates or shifts on how you're thinking about managing that heading into 2023?

Speaker 4

Yes. We haven't had a similar opportunity to lock in favorable rates for 2023. So, we're very pleased that we locked it in for this year. It's been almost a $70,000,000 benefit to us this year. But, and we'll continue to look at ways that we can potentially mitigate that going into 2023.

Speaker 4

But so far, we haven't found any favorable opportunity To do that, because we've just continued to see as we go through the year, more pressure on short term rates going into next year. With some of the recessionary pressures that we've In the market, I think that's starting to loosen up a little bit. So we'll continue to take a look at it, but nothing yet.

Speaker 5

Great. Thank you.

Operator

Our next question comes from Chase Mulvehill with Bank of America. Your line is open.

Speaker 12

Hey, good afternoon. I guess I wanted to come back and kind of hit on guidance a little bit. I guess, just specifically on gathering volumes, I think you guided up originally 10%. And I think you noted here that you're going to be above that, And you kind of mentioned that in last quarter's conference call as well. And you've obviously given us the sensitivity here that we can use towards your guidance.

Speaker 12

So how much do you think that gathering volumes will be up now? And I guess maybe what's included in the updated guidance?

Speaker 3

So we think it's going to be up I think it's around 13% And versus the 10, and it is included in our updated guidance.

Speaker 12

Okay, Great. And can I ask kind of maybe it's a little more technical question, but around kind of brownfield Permian egress expansions? How should we think about the timing and how this incremental capacity will pull through incremental volumes? Basically, what I'm asking is, will you be able to pull through more volumes gradually as you add each incremental compression station? Or you ultimately all start the incremental production at once at the end when you have all the compression stations added?

Speaker 6

Yes. No, I think it's more of a light switch experience as we push November, December of 23. Now there'll be certainly Test volumes, additional volumes that we do test along the way. But I think to get to the ultimate delivery point where the customers want to go, that'll all happen November, December 23.

Speaker 12

Okay, perfect. I'll turn it back over. Thanks.

Operator

Our next question comes from Michael Blum with Wells Fargo. Your line is open.

Speaker 7

Thanks. Good afternoon, everyone. I wanted to maybe just start with The opening comments about the stock price, I'm just wondering if you could expand a little more there. And I guess specifically, are there Are there any specific actions that you're contemplating that to impact the stock price here?

Speaker 1

Well, I've learned a long time ago that the ability Of management team to influence the stock price is pretty remote. But let me just say and the point of what I was trying to do is I Thank you. It's not just Kinder Morgan. I think there's a tremendous disconnect between the way the market is valuing midstream energy companies. For instance, there's much more of a correlation with crude oil prices in our stock than there ought to be.

Speaker 1

As we tell everybody at the beginning of the year, Exactly how much the impact is per dollar of change in crude and natural gas prices. And of course, that's Relatively small number of lessons as you get further into the year. That's just one example of I think kind of a knee jerk reaction in the market. I think the best thing we can do as a management and board is to stress again and again The strength of our cash flow and the fact that we're using it wisely. And I think we demonstrated that in this quarter in the way we've deployed our cash.

Speaker 1

So that's our game plan, pretty simple and not very imaginative really. But I think in the long run, Maybe we're the tortoise versus the hare, but in the long run, I think we get rewarded for the kind of performance we have produced now Quarter after quarter after quarter.

Speaker 7

All right, great. Thank you for those comments. I guess my second question well, first of all, Anthony, congratulations on the expanded responsibilities. And maybe I'm reading into this, but my question is really With the promotion to run both Energy Transition and CO2, can I read anything into that about maybe enhanced Thanks for carbon capture? You're kind of bringing these two things under the same roof.

Speaker 2

Look, I think We feel like there are some synergies there and I'll ask Anthony to expand on that. But I mean, we'll use the same geologists for carbon capture and sequestration as we do for CO2, I mean, we've been sequestering CO2 for decades and we use it in connection with the enhanced oil recovery operations obviously, but It's the same technology, if you will. And so we think there is synergy there and there are a few others, but I'll turn it over to Anthony to answer the rest.

Speaker 8

Yes. I mean, obviously, Jesse had a great opportunity and we wish him well. And it's a great opportunity for me and I've inherited a really great team, so I appreciate that. I don't think you're going to see Nothing materially different from the way we kind of run things moving forward. As Steve mentioned, I think As we have been moving forward with ETV, it's become more and more apparent.

Speaker 8

There's a lot of overlap, especially With the CO2 groups, all the technical experience there that we've been using, and we'll be further integrating Those groups and taking advantage of that, and I think that will provide some nice commercial synergies down the road. But We don't have anything special to announce, and I don't think you're going to see the way we run The CO2 business or ETV to be materially different from the way Jesse was doing?

Speaker 2

Yes. And I think the further Integration benefits that we have the same operations organization. So some of these were it was a small company we acquired and we have other acquisitions We're integrating and so having a common operations platform, I think will be very helpful. We also have a common project management platform, Which is also helpful. And of course, we've always had a centralized procurement organization and bringing the power of that procurement organization to bear On these development opportunities, I think all that will pay dividends.

Speaker 2

But this is not leaning into The CCUS, that will we think there are opportunities there. We think they're coming, but coming slowly. And there's some resolution of 45Q tax credit levels and things like that that still needs to unfold. But anyway, this business fits together, So it stays together.

Speaker 7

Great. Thank you very much.

Operator

Our next question comes from Keith Stanley with Wolfe Research. Your line is open.

Speaker 13

Hi, good afternoon. First, I wanted to ask just on The next wave of LNG projects, so you have this $600,000,000 project you're announcing on TGP and SNG tied to Plaquemines. Can you talk to which specific LNG projects we should track more closely that you see more opportunity To potentially provide gas services to and is there any way to frame the potential investment opportunity in dollars around new LNG projects in the next 5 years? So should we Other $600,000,000 type investment opportunities tied to the next wave of projects?

Speaker 6

Yes. I mean, I don't want to call winners and losers in here, but I mean, I think the way you would think about this is those that have been successful to this point already, I think, have a good chance of Being more successful over time by virtue of expansions of their existing footprints, there's certainly some new Entrance that we're very excited to be partnering with to grow along with Texas, Louisiana Gulf Coast. And again, I think given the proximity of our footprint, we're talking to all of these developers and working with all of them And looking for ways to expand our footprint and even build some greenfield projects to support of their growth. So we feel very bullish about this opportunity and we think there's significant investment opportunity here over the next 3 to 5 years.

Speaker 3

Yes. And so as a result, some of the opportunities, we'll be able to utilize capacity on our existing system or add Compression and they'll be very, very efficient. And then some of the opportunities will require greenfield, some level of greenfield development. So it will be a combination of both.

Speaker 1

And I think the macro opportunity here is incredible. I'll come back to what Kim said, Depending on which expert you listen to, the projections are that between now over the next 5 years or so, you're going to have 11 to 13 or 14 Bcf a day in growth in LNG. We fully expect to be able to maintain our 50 Percent share, which we have now, that's an incredible increase in throughput, a lot of which is attributable to the present System that we have in place along the Texas and Louisiana Gulf Coast. It's an incredible green shoot for Kinder Morgan.

Speaker 13

Thank you all for that. And a separate question, I guess, kind of revisiting Michael's question from earlier. So The company hasn't really done material stock buybacks since really kind of 2018. And it looks like you did $270,000,000 The average price implies that was kind of done over the past month for the most part. So I know you've talked to being bullish on the stock price, but just any other color on what changed in the market or just the decision process because it's Pretty material step up in buybacks in a brief period.

Speaker 13

And how you're thinking about that, I guess, over the balance of the year since you still have available capacity?

Speaker 2

Maybe I'll start and David, you can fill in. But we kind of planned to look at how the year was unfolding over the Q1 And to get a lot of confidence around it, we live in uncertain times, right? So we were we have Good strong cash flows are secured by contracts and all of that. We've got a lot of stability in our business, but kind of wanted to see how the year was unfolding. And so that was then Things look good.

Speaker 2

We talked about it looking good in Q1. Thought we were going to be up on guidance, but didn't quantify it for you. And So that was a good opportunity. We had to use some capacity and we stuck to our opportunistic approach To share repurchases and that's exactly what we expect to continue to do. And we would expect, you can't call it for sure, we would expect to have opportunities Do more through the course of the year.

Speaker 4

The one thing I think Steve covered it. I just we would balance Some of the additional spend that we've already incurred with the additional available capacity that we generated because of our EBITDA outperformance. So we'll look at a balance Of those items along with the opportunistic share repurchases for the rest of the year.

Speaker 5

Thank you.

Operator

Our next question comes from Mark Salicito with Barclays. Your line is open.

Speaker 14

Hi, good afternoon. With inflation tracking where it is, that should be a nice tailwind for your products business. Just wondering if you can maybe comment on how that interplays with Yes. The broader macro and any competitive dynamics across your footprint and your ability to fully pass that through?

Speaker 10

Yes. No, based on what our PPI, we follow the FERC methodology on our FERC policy at the 92 pipes, Which right now is PPIFG minus 0.21 percent and we implemented the Great increase on July 1 of 8.7 percent across our assets and based on where it's tracking right now. I think the assuming we would PPI continues where it is and that we would implement the full thing, which is what we would expect. It's somewhere in the neighborhood of 15% next year.

Speaker 14

Great. Appreciate the color there. And then on your CapEx budget, the $1,500,000,000 for this year, should we think the bulk of CapEx spend on PHP will come in 23 or is that any context into what the CapEx cost component of these expansions could be? And then on Evangeline Pass, Could we see CapEx move higher this year subject to definitive commercial agreements or that's been mostly come in later years?

Speaker 2

They're going to be later, Yes, partly because we've got a regulatory process to go through and quite on PHP, it's going to be mostly in 2023.

Speaker 3

And the

Speaker 10

$20,000,000,000 Got it.

Speaker 14

Appreciate the time.

Operator

Our next question comes from Michael Lapides with Goldman Sachs. Your line is open.

Speaker 5

Hey, guys. Congrats on a good

Speaker 15

quarter and congrats To Tom, to Anthony for the movement around in the greater opportunities. One kind of near term question, refined products pipeline Volume or throughput during the quarter, little bit weak on gasoline, little bit weak on diesel. Can you just kind of talk about whether that's Geographic specific to you, whether that's more just general demand destruction due to price, especially on the diesel side?

Speaker 10

Yes. We are seeing a little bit of demand destruction A bit across the system, I would say on road fuels. Jet fuel, as you would expect, as you see nationally, a pretty strong Increase, I mean, I think the EI numbers on JET are about 18. As Kim said, we're about 19. On diesel, you saw a larger decrease On our assets, EIA was just right around 3%.

Speaker 10

We were closer to 11%. But I will remind you on diesel, We are still within 2% of where we were in 2019. We saw a big jump last year on diesel volume. So while we Seeing a come off compared to Q2 of last year, it's still pretty robust. But we have seen A little bit of demand destruction, but I think you've seen gasoline prices across the country come off for, I want to say, 35 days straight.

Speaker 10

So We've seen customer response. We've also seen price response.

Speaker 15

Got it. And maybe a follow-up for Anthony. Just Thinking about the landfill gas deal that you announced today, and I think you made a comment that kind of build multiple, Call it roughly 8 times. Is that kind of a year 1? And that therefore, as we think about it over time, That build multiple actually gets better over time as production there ramps?

Speaker 15

Or is that what you think kind of a steady state would be? And How do you compare that to the EBITDA and returns on capital that you get out of the natural gas pipe, kind of the core gas pipeline business?

Speaker 8

Yes. I mean, it ramps up to 8% and gets better from there. So there is growth That this landfill, which is really primarily driven by the Arlington asset, we have perpetual gas rights there and there is a potential That we have down the road on that asset. And so the EBITDA multiple gets better over time. I'd say The 8 times is more than an average over the medium term there.

Speaker 8

With regards How we think about, nat gas, I think we'd look at it on different types of opportunities as a very But I think in terms of the opportunity here as we think about our RNG portfolio, these are assets which are largely derisked. There are in operations today. There are, as I said, long term gas rights Here with Arlington, there's an expansion and growth opportunity. And so I think it's an attractive acquisition In terms of how we think about that in this space.

Speaker 2

And this is a general comment, Michael, but as we said at the beginning, We have not had to sacrifice our return criteria and have not had to sacrifice the margin above our weighted average cost of capital To be able to invest in these things, we've been very selective about how we've entered this sector.

Speaker 15

Got it. Thank you, guys. Much appreciated. I'll follow-up with the team offline.

Operator

Our next question comes from Brian Reynolds with UBS. Your line is open.

Speaker 16

Hi, good afternoon, everyone. I'm curious just on Ruby Pipeline, if there's any updates on the bankruptcy And if there are any initial thoughts on a near term resolution as it relates to nat gas service and if there's any commentary on potential long term CO2 Transport given a regional peer looking to do the same. Thanks.

Speaker 2

Yes. We'll ask Kevin Gromman, our Head of Corporate Development.

Speaker 17

Yes. So in terms of the bankruptcy proceeding, Ruby has in place an independent set of managers who have been Managing a lot of the day to day on the proceedings. There have been some recent court activity around A timeline proceeding forward around a potential 363 sale and just getting to a resolution of the case Along a certain timeline. So that's where it stands. I can't comment on any specific negotiations or discussions with parties involved.

Speaker 17

I will point to our prior comments on this, which is anything that KMI does around Ruvi is going to be in the interest of KMI Shareholders, I think as it relates to your question around potential conversion of CO2 service on the pipe, I think first, The pipe does continue to serve a need for the California markets. And so there it is a Pipe that has a good service, natural gas service today. But across our network, we are looking at repurposing opportunities. But, I think our general view at this point is those are longer dated opportunities.

Speaker 16

Great. Appreciate the color. And then a quick follow-up on the guidance raise, just given some of the acquisitions during the During the year, I'm curious if you could just kind of break out organic grades versus the contribution from some of the acquisitions year to date? Thanks.

Speaker 2

Yes. I mean, I would say it's I mean, if we do have a little bit of benefit from commodity prices, but we also have Benefit from our underlying base business and a lot of that has come from we're seeing some attractive renewals in the natural gas business And that's really in multiple places. It's on our Texas intrastate business. It's on NGPL. It's growth in our gathering business.

Speaker 2

So it's really I think a lot of that is organic strength in those contracts as we roll off. There's some contribution from expansion capital during the but a lot of that ends up getting budgeted for the year based on what we know going in. And a lot of what we do that we sanction in the year ends up benefiting subsequent years. So I think you can attribute it to Commodity price tailwind and just organic growth in the base existing footprint.

Speaker 3

Because things like Stagecoach, we budgeted. Expansion that we knew about before the year started, we budgeted. And most expansions that we found that we're doing this year don't come on until 2023 or 2024 and beyond.

Speaker 17

Great. That's super helpful.

Speaker 16

And just for our clarification, just for the original guide on the landfill acquisitions, was that included before or is No, that included in this kind of 5% raise. Thanks.

Speaker 3

Kinetrix was included in the budget, And Nana would be incremental I mean, Moss would be incremental to the budget.

Speaker 16

Okay. Appreciate it. Have a great rest of your evening, everyone.

Speaker 5

Thank you.

Operator

Our next question comes from Michael Cusimano

Speaker 18

First, just is it fair to assume that the declines on Highland and HH were weather related? And Can you talk through about like how that's recovered and maybe how the volume growth outlook has changed, if any, going forward?

Speaker 2

Do you have an answer on the volume stat?

Speaker 10

Yes, definitely. On Highland, I would say, the overwhelming majority of it is. I mean, just To give you some of the numbers and that was the unexpected storm that came through in April, we were doing roughly north of 200,000 barrels a day In prior to that, in April, we ended up doing 163, and then we averaged about 1.88 for the quarter, but we're back in June doing roughly 2.07. So it was a big chunk of it. For HH less, That has a lot more to do with the spreads out of the Bakken, but it was absolutely the issue for Highland Creek.

Speaker 6

And the gas lines have recovered back to sort of pre outage levels.

Speaker 18

Okay. That's helpful. And then looking at the terminals business, so you mentioned utilization rates are down a little bit because of the backwardation. And then Jones Act, it sounds like it's kind of troughed at this point. Am I wrong in thinking that we've reached like a maybe like a new base level for that segment?

Speaker 18

Or are there other puts and takes that I need to think about?

Speaker 2

No, you're correct. I mean, the rate degradation that we've seen is specifically just in New York Harbor. We've seen rates actually Turn to the levels we saw last year in the Houston area and we're back to a 100% utilization there. As it relates to APT, We saw a trough last year, rates descending into the mid-50s per day, and They are back into the mid-60s now. We're 100% utilized.

Speaker 2

All of the vessels are moving. And we're We're seeing an increase in term where we were around 2 year term last year. We're now looking at 6.2 years, with likely renewals. So did you answer your question? Yes.

Speaker 18

Okay. And was the Gain on sale, as you all mentioned, that was excluded from the EBITDA that you reported?

Speaker 2

What? What was the gain on sale? Jane on sale was due to Jane on sale, was that excluded from EBITDA?

Speaker 3

No, it's in EBITDA. So we have a level, Certain level, dollars 15,000,000 that anything that's below $15,000,000 that's Like a gain on sale or something like that, it stays in the DCF. Anything that is above that, would we take out. That's the non recurring in nature, we take out of DCF. We had a lower threshold for a long time.

Speaker 3

It created a lot of noise in our numbers, and made things confusing for people. And so we've raised that threshold, Which I think it makes it simpler for our investors and also is better at excluding really the one time Items because from time to time, we do have some land sales and that and so I think that the higher threshold just makes a lot of sense.

Speaker 2

Those smaller non recurring pluses and minuses now get reflected.

Speaker 12

Okay. Got you.

Speaker 18

And is that something that you all would quantify In other the queue or materials going forward?

Speaker 4

The amount of smaller Non recurring items that are impacting our EBITDA and DCF? No, we won't. We'll just let that flow through. We'll explain it like we are today, like on this Land sale will explain the gains and losses if they're large enough to explain.

Speaker 2

We'll continue to explain the ones that are Larger non recurring items, so this will continue to be carved out, but there'll be less noise with this. But again, the smaller positives and negatives will flow through.

Speaker 18

Got it. All right. That's all for me. Thank you all for the clarification.

Operator

Our final question comes from Harry Mateer with Barclays. Your line is open.

Speaker 19

Hi, good afternoon. Just 2 for me. I think, the first now that we're at the midway point of the year, would like to get an update on, how you're navigating Refinancing plans, you got some maturities coming due early next year. I think you could probably call them out late this year. So how you're thinking about navigating that?

Speaker 19

And then Secondly, there was a line in the press release about expecting to meet or improve on the debt metric goal. And I just want to confirm that that's referring to the 4.3 times budget Rather than like a formal change to the approximately 4.5 times goal you guys have had for a

Speaker 2

couple of years? Thanks.

Speaker 4

Yes. No, that is referring to our ending the year better than our budgeted level. That's what we currently expect. But with regard to kind of how we are navigating issuances and how we're going to handle some of the maturities coming due, as I'm sure you're aware, Harry. We're through our maturities for 2022.

Speaker 4

We do have about a little bit more North of $900,000,000 in CP currently. So but that's why we have a $4,000,000,000 credit facility to handle Short term needs like this from time to time. And since we have $3,000,000,000 plus capacity available, we don't have any rush to term that out. So we can be patient there. We'll look To potentially turn that out sometime in the near term, but we'll be patient, we'll wait for favorable conditions.

Speaker 4

And then next year, it is a 3 point $1,000,000,000 maturity year. So it's relatively large, but we got the full year to do it and we have the revolving capacity revolver capacity To manage timing that out, waiting for favorable market condition.

Speaker 19

Okay, got it. But the company's formal Leverage target is still 4.5 turns. Is that right, David?

Speaker 4

Approximately around 4.5 turns. That's right.

Speaker 5

Got it. Okay. Thank you.

Operator

We have no more callers in the queue.

Speaker 1

Okay. Well, thank you very much, Jordan, and thanks to everybody for listening in. Have a good day.

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Earnings Conference Call
Kinder Morgan Q2 2022
00:00 / 00:00