The Operator welcomed the participants to the Quarterly Earnings Conference Call and turned the call over to Rich Kinder, Executive Chairman of Kinder Morgan. Rich Kinder thanked Steve Kean, the current CEO, for his service to the company over the past two decades and for his leadership as CEO for the past eight years. He also noted the importance of orderly succession planning, and that Steve will stay on the Board and continue to contribute to the company's success.

Rich Kinder announced that Kim Dang and Tom Martin would be taking over the roles of President and Vice President in January, and that they would be joined by Rich in the office of the Chair. The Board and Rich are confident that the transition will run smoothly due to Kim and Tom's long experience with the company and the midstream energy business. Rich also expressed optimism for Kinder Morgan's future due to the forecasted growth in natural gas demand over the next five years, which could drive expansion and extension opportunities for their network. Finally, Rich thanked Steve Kean for his work and dedication to the company.

The company had a good quarter and year, beating their budget for the second quarter. Despite lower commodity prices, their business is performing better. The company added $500 million of new projects to their backlog and brought $450 million of projects into service. The first of their Wabash Valley RNG projects was later than planned and a little more expensive, but still yielded a good return. The EPA's June order established the renewable volume obligation for the next three years, pushing D3 RINs up over $3.

In the Natural Gas business unit, transport volumes increased by 5% compared to the second quarter of last year due to EPNG’s Line 2000 return to service and increased power, LDC, and industrial demand. Gatherings volumes were up 19%, driven by Haynesville, Bakken, and Eagle Ford volumes. Kim Dang expressed her excitement for the future of the company and her appreciation for Steve’s help in the transition.

In the Product Pipeline segment, gathering volumes were up 7% in the quarter, and are expected to be up 16% for the year. Refined products were flat, road fuels were down 2%, gasoline volumes were impacted by refinery maintenance, and diesel volumes were down due to renewable diesel being transported by other methods. Jet fuel volumes increased 9%, and crude and condensate volumes were up 4%, largely due to higher Bakken volumes. In terminals, liquids lease capacity remained high at 94%, and excluding tanks out of service for inspections, 96% of capacity is leased.

In the second quarter of 2023, the company declared a dividend of $0.2825 per share, which was a 2% increase from the previous year. Utilization at their key hubs increased, and rates on their renewals in the Houston Ship Channel were slightly positive. Volumes were flat overall, but excluding grain, they were up 5.5%. Oil production increased 7% due to strong performance, and they expect net oil volumes to exceed their plans for the year. The company ended the quarter with a net debt to adjusted EBITDA of 4.1 times and had almost $500 million of cash.

In the third quarter of 2022, the company repurchased $203 million worth of shares, and their total share repurchases for the year reached almost 20 million shares at an average price of $16.61. Revenue was down $1.65 billion from the second quarter of 2022, but cost of sales was also down $1.7 billion due to the large decline in commodity prices. Gross margin grew, interest expense was higher, and net income was $586 million, down 8% from the second quarter of last year. Adjusted earnings was $540 million, down 13% compared to the second quarter of ‘22. The company's Natural Gas and Terminals segments were up, while their Products and CO2 segments were down.

The Natural Gas segment saw the largest outperformance due to greater sales margins in Texas and favorable rates on re-contracting in the Midcontinent Express Pipeline. The Product Pipeline segment was down due to unfavorable pricing impacts and re-contracting on the KMCC asset. The Terminal segment was up due to improved contributions from the Jones Act tanker business, expansion projects, and rate escalations. The CO2 segment was down due to CO2, NGL, and oil prices. The adjusted EBITDA was down 1% from the previous year, and the DCF was down 9%. Net debt decreased by $139 million since the beginning of the year, and cash flow from operations was $2.883 billion.

The company has seen outperformance in their natural gas assets and interest rate business due to the volatility in the market, but their storage is full which may limit their ability to take advantage of that in the second half of the year. The company has not assumed the same level of outperformance in the back half of the year as what was seen in the first part.

Kinder Morgan anticipated the increase in Renewable Volume Obligation (RVO) from the EPA in June and held onto their RINs instead of selling at $1.95, allowing them to sell at $2.90 and above. The RVOs were very supportive for RINs pricing and Kinder Morgan has taken advantage of the uptick in pricing. They anticipate that there is no reason for RIN prices to diminish for the remainder of the year.

Steve Kean mentioned that the $500 million added to the backlog was primarily from the EOR and natural gas sectors. Anthony Ashley added that there have been multi-month delays on the RNG projects due to supply chain, weather, and commissioning issues, however they have their first facility in service. Theresa Chen asked about the outlook for D3 RIN pricing over time to understand the returns of the projects.

Steve Kean discussed how they take into account the supply of D3 RINs and how they sensitized their investments for worst case scenarios. He also discussed the RVO targets that were released for three consecutive years and how they are supportive for RIN prices. He also mentioned eRINs and how they view it as a potential avenue for demand growth. Theresa Chen then asked about the average EBITDA multiple of the remaining $2.6 billion in projects and why it is now 4.2 times versus 3.9 times previously.

The paragraph discusses how Steve Kean and his team take into account the supply of D3 RINs and how they sensitized their investments for worst case scenarios. He also discussed the RVO targets that were released for three consecutive years and how they are supportive for RIN prices as well as the potential of eRINs. Theresa Chen then asked about the average EBITDA multiple of the remaining $2.6 billion in projects and why it is now 4.2 times versus 3.9 times previously.

David Michels explains that the change in the backlog is due to the difference between projects that went into service and those that were added in the quarter. The projects that went into service had lower multiples and were more G&P type projects, while those added had higher multiples more in line with longer haul pipeline opportunities. Kim Dang then explains that the decision to exclude CO2 and G&P projects from the backlog multiples is to provide a better proxy for estimating what cash flow is incremental and stably recurring, without changing the way they think about these projects.

The Midcontinent Express (MEP) pipeline has seen a positive trend in the last couple of quarters due to Oklahoma Basin Drilling, and this is expected to continue due to increased competition from LNG facilities on the Louisiana Gulf Coast and Southeast markets. To capitalize on this, the company has been selling its capacity in two to three-year tranches, waiting for the spread to widen.

Rich Kinder and Sital Mody discuss Midstream's three primary basins, noting that smaller producers are becoming more price sensitive in the Haynesville, while the Bakken and Eagle Ford are continuing to see growth. Steve Kean then explains the Markham expansion, which is a 6 Bcf expansion with 650,000 additional withdrawal capacity that will be offered to their customer base.

Steve Kean of the company discussed how they have been doing well in terms of enhancing their crude pipeline assets and attracting additional volumes to the system. They are now looking to extend this into the gas marketing arena, but in a non-speculative and gradual way. Additionally, they have been able to make money in the state of Texas by buying and selling natural gas with reference to the same Houston Ship Channel price and using their excess storage to optimize profits.

David Michels and Kim Dang discussed the company's share repurchase program. They explained that they take an opportunistic approach and don't have a programmatic approach. They want to take a balanced approach and use balance sheet capacity if the share price makes sense. Lower than budgeted commodity prices impacted the company's results.

Kim Dang explains that the forecast given for gas and crude prices is based on the current forward curve. Rich Kinder then asks Dax Sanders to speak about the re-contracting rates in the Eagle Ford basin. Dax explains that there is still one contract there and the rates that are rolling are lower than the original legacy contracts from 2013 and 2014. The capacity held by third parties is 85 a day and 75 held by the intercompany marketing affiliate. The contracts have largely already rolled from the high legacy rates and they will continue to roll, but there won't be any major changes.

Dax Sanders and Jean Ann Salisbury discussed the potential for widening differentials between Texas and Louisiana gas due to the Permian gas not being able to reach Louisiana LNG. They also discussed the need for infrastructure to get from the western side to the eastern side of Louisiana. In addition, Neel Mitra asked about the potential for expanding GCX in the Corpus Christi area due to increased demand. Sital Mody responded to the question.

NextDecade has been successful in getting their project across to FID, and there is increased interest in the Permian project, Freer to Sinton project, and GCX. Steve Kean clarified that the reference to NextDecade was separate from GCX, and the discussions had gone cold but are now active again. Kim Dang clarified that the purchase and sales for the Texas Intrastate network are typically locked in for a year or more, and there is a market for the transport spread. They also have capacity between Waha and Houston, which they have hedged for this year and next.

Kim Dang explains that Kinder Morgan is comfortable with a 4.5 times leverage target, as it is rated BBB plus and can raise debt at reasonable rates. The current leverage is 4.1 times, which provides flexibility to take advantage of nice opportunities.

Steve Kean states that Kinder Morgan will not change their return targets and will continue to pursue projects with a 15% unlevered after-tax return, even if it increases the multiple on their backlog. He clarifies that they would be willing to go below 15% for long term contracts, but not into single digits. When asked about Carbon Capture and Storage (CCS) projects, he states that there is nothing new to share from Kinder Morgan's perspective.

Kinder Morgan is actively involved in the CCS industry, having already completed a project in West Texas and continuing to have conversations with potential partners in the Gulf Coast. They are looking at opportunities to transport and sequester CCS, applying their expertise in the field.

This summary was generated with AI and may contain some inaccuracies.