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Kinder Morgan (KMI) Q2 2021 Earnings Call Transcript


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Kinder Morgan (NYSE:KMI)
Q2 2021 Earnings Call
Jul 21, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome to the Kinder Morgan’s quarterly earnings conference call. Today’s call is being recorded. If you have any objections, you may disconnect at this time. [Operator instructions] I would now like to turn the call over to Mr.

Rich Kinder, executive chairman of Kinder Morgan. Thank you, sir. You may begin.

Rich KinderExecutive Chairman

Thank you, Missy. Before we begin, as usual, 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 and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decision, 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 that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. With that out of the way, let me just say that like a broken record, each quarter, I open our call with comments on the strong cash flow we’re generating and how we’re using and intend to use that cash flow.

Whether you look at our cash flow for the second quarter, for year-to-date, or our projections for the full year, it’s apparent that we continue to be a strong generator of cash flow. It’s also apparent that we continue to live comfortably within that cash flow. The question investors should ask on a continuous basis is whether we are wise stewards of that cash. We have said repeatedly that we would use our funds to maintain a strong balance sheet, pay a good and growing dividend, invest in new projects or acquisitions when they met our relatively high return hurdle rates and opportunistically repurchase our shares.

This quarter, we announced two fairly significant acquisitions. The first was our purchase of the Stagecoach natural gas storage and pipeline assets in the Northeast for approximately $1.2 billion. These assets expand our services to our customers by helping connect natural gas supply with Northeast demand areas. The acquisition is immediately accretive to our shareholders, and I believe it will be an important and profitable asset for KMI for many years to come.

Our second acquisition is to make an attractive platform investment in the rapidly growing renewable natural gas market by purchasing Kinetrex for approximately $300 million. Steve will talk about this acquisition in detail. We believe there is a bright future for this business and other related energy transition businesses; that we are exploring. Now, let me conclude with two important points.

Both of these acquisitions meet our hurdle rates that I referred to earlier, and both are being paid for with our internally generated cash. I believe both fit within the long-term financial strategy that I speak to each quarter, and I can assure you that our board looks at all alternatives in a manner completely consistent with that financial strategy. And with that, I’ll turn it over to Steve.

Steve KeanChief Executive Officer

OK. Thanks, Rich. I’m going to make a couple of additional comments about the two acquisitions and then turn it over to Kim and David. On the Stagecoach, storage and transportation assets drew $1.2 billion.

We closed that transaction earlier this month. It adds 41 Bcf of certificated and pretty flexible working gas storage capacity and 185 miles of pipeline. We’re excited about this transaction for several reasons. As we discussed on the first-quarter call, we think storage value is going to increase over time.

Its value was certainly revealed during Winter Storm Uri, and we’ve seen that start to show up in our commercial transactions. Storage will also become more valuable as more intermittent renewable resources are added to the grid. The Stagecoach assets are well interconnected with our Tennessee Gas Pipeline system, as well as other third-party systems in a part of the country that is constrained from an infrastructure standpoint, and frankly, where it is difficult to get new infrastructure permitted and built. We’re excited about this transaction and believe it will pay off nicely for our shareholders.

The second transaction, which we announced at the end of last week, was accomplished by our newly formed Energy Transition Ventures Group. We put that together in the first quarter of this year. We’re acquiring Kinetrex, a renewable natural gas business, subject to regulatory approval and a couple of other closing conditions. At signing, Kinetrex had secured three new signed development projects that we will build out over the next 18 months, resulting in a purchase price plus capital at a less than six times EBITDA multiple by the time we get to 2023.

With Kinetrex, we’re picking up a rare platform investment in a highly fragmented market. It gives us a nice head start on working on hundreds, if not thousands, of potential renewable natural gas project candidates in the U.S. A few more points on this deal. As several of you pointed out in your comments post announcement, the value is dependent on RINs value.

You don’t make money on the gas sale, with an important exception that I’ll get to in a minute. Importantly, the particular RINs that this business generates are D3 RINs, which can be used to satisfy other RINs obligations as well. D3s are for advanced biofuels and promoting more of those in the transportation fuel market has had bipartisan support and even more support from the environmental community than conventional ethanol. While there is some regulatory flexibility in EPA’s hands, there is an underlying statutory framework, again with bipartisan support, combined with widely acknowledged greenhouse gas benefits that further protects the value of this category of RINs in particular.

Having said that, we believe we’ll have the opportunity to mitigate our exposure to RINs pricing volatility. Based on conversations with potential customers, not signed deals yet but conversations so far, there is significant interest in renewable natural gas in the so-called voluntary market. These are customers who are outside of the transport fuel market who are interested in reducing their carbon footprint and we believe would transact on a long-term fixed price basis. There are also potential customers interested in sharing the risk and reward of the RINs value.

So we will look for appropriate ways to lock in the value of the environmental attributes on attractive terms. When we talked about our Energy Transition Ventures Group in the past, we’ve talked about transacting on attractive returns for our shareholders, not loss leaders and not doing things for show. This deal is a great example of that. In the team’s short existence so far, they’ve acted on an attractive opportunity, and they continue to work on a number of other specific project opportunities.

So very good progress in a short period of time. These two deals illustrate a couple of key points, broader points, about our business. The larger deal, Stagecoach, is a further investment in our existing natural gas business, where we own the largest transportation and storage network in the country. That reflects our view that our existing business will be needed for decades to come.

Hydrocarbons, and especially natural gas, have very stubborn advantages and will play an essential role in meeting the growing need for energy around the world. That’s something we are well positioned for with our assets and especially considering our considerable connectivity with export markets, especially in natural gas but also in refined products. At the same time, we do see opportunities in the energy evolution, I’m putting emphasis on evolution, and we’re positioning ourselves there as well. We’re doing this in our base business, where our gas delivery capability provides the needed backup for renewables at far lower cost and longer duration than batteries.

We’re doing it in responsibly sourced, that is low methane emissions, natural gas. We had our second such transaction this…


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