Kinder Morgan Inc - Class P (KMI) — Q1 2019 Earnings Call Transcript

Thank you, Jennifer. Before we begin, as usual, I'd like to remind you that today's earnings releases by KMI and KML and this call includes forward-looking and financial outlook statements within the meaning of the Private Securities Litigation Reform Act of 1995, Securities and Exchange Act of 1934, and applicable Canadian provincial and territorial securities laws, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking and financial outlook statements and the use of non-GAAP financial measures set forth at the end of KMI's and KML's earnings releases, and to review our latest filings with the SEC and Canadian provincial and territorial securities commissions for a list of important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking and financial outlook statements. As usual before turning the call over to Steve, Kim, and the rest of the team, I'd like to provide a quick update and some insight on our financial philosophy of Kinder Morgan. The important news today is that our Board has increased the dividend by 25% from $0.20 per quarter or $0.80 annualized to $0.25 per quarter or $1 annualized. Now this is consistent with our intention which we announced in mid-2017 to increase the dividend to $0.80 in 2018 to $1 in 2019 and to $1.25 in 2020. Central to our ability to do this is the strong and growing cash flow our assets are generating and you will see that again in the first quarter's results. We had used that cash to get our balance sheet in shape having paid off over $8 billion of debt and received credit upgrades from both S&P and Moody's, and we intend to maintain our improved credit metrics. Beyond that we are now focusing on using our cash to fund our expansion CapEx without need to access the equity market to pay our increasing dividends and to repurchase stock when appropriate. In short, we believe we are being careful and conservative stewards of our cash flow and using it in ways that benefit all our shareholders. You should expect no less from us and should be reassured by the fact that the management and board of KMI are significant shareholders. Steve?

Yes, thanks Rich. We'll be updating you on both KMI and KML assessment. I'm going to start with a high-level update and an outlook on KMI and then turn over to our President Kim Dang to give any update on our segment performance, David Michels, KMI's CFO will take through the numbers, Dax Sanders will update you on KML, and then we'll take your questions on both companies. The summary on KMI is this: we're adhering to the principles that we've previously laid out for you. We have a strong balance sheet having met our approximately 4.5X target of debt-to-EBITDA and with ratings upgrades from both Moody's and S&P; we're maintaining our capital discipline through our return criteria, a good track record of execution and by self-funding our investments. We are returning value to shareholders with the 25% dividend increase announced today and we continue to find attractive growth opportunities with a net add of $400 million to our backlog during the quarter. Again, strong balance sheet, capital discipline, returning value to our shareholders, and finding additional growth opportunities. Those are the principles we operate by. Here are a few updates on some of the key projects. First, our Permian Natural Gas Pipeline project. Our customers are anxious to have us get their gas out of the Permian, so they can also get their oil and NGLs out. We have two projects to get the gas out: Gulf Coast Express and Permian Highway each are about 2 Bcf a day of capacity. Both are secured by long-term contracts and both are in the execution stage. GCX is scheduled to be in service in October of this year with Permian Highway following a year later. Both projects are on schedule. Both projects are at attractive returns which we expect to realize and both projects bring us additional opportunities in our downstream pipeline. Combine they bring 4 Bcf a day of incremental gas to a system that moves about 5 Bcf a day today. Those projects will bring opportunities for downstream expansion and optimization as we find homes for that incremental gas through our connectivity with LNG facilities, Mexico exports, utility demand, and Texas Gulf Coast industrial and Pet Chem demand. Our execution and our economics of these projects both look good and we're actively managing our risks and opportunities on both. These projects show us taking advantage of a very positive situation: there is a large supply growth in Texas and a large demand growth in Texas and we can bridge the two and connect to our premier Texas Intrastate Pipeline Network and stay entirely within the State of Texas which facilitates permitting and commercial flexibility. As we pointed out at the conference in January of this year, 70% of the demand growth between now and 2030 is projected to be in Louisiana and Texas largely due to LNG and our systems are well positioned to benefit from that. Also, it's worth noting that now 70% of our backlog is natural gas and 56% of that is in our Midstream growth where market-based rates in terms of service prevail. On another key project, Elba, our LNG facility that we're building in Savannah, Georgia, we are closing in on the in-service date for the first unit. We now expect in-service of that unit to be around May 1, a couple of weeks from now. Getting the first unit on secures about 70% of the project revenue. That way we've experienced is certainly unwelcome but the risk allocation between us, our contractor, and our customer provides significant protection and mitigates the effect to our IRR. So we're introducing natural gas into the facility as well as refrigerants and that process has been doing well. Also of note, we added a net $400 million to the backlog this quarter with new investments in natural gas and terminals primarily more than offsetting projects placed in service. The backlog now stands at $6.1 billion.

Thanks, Steve. Looking at the segments, Natural Gas had another strong quarter with a 12% increase. The market fundamentals for 2019 remain solid. Lower 48 natural gas demand is projected to rise by 5.5 Bcf to around 95 Bcf a day, while production is expected to increase by 7.5 Bcf a day. Growth in the Natural Gas markets during the first quarter is yielding excellent results for large diameter pipes. Transport volumes on our transmission pipe rose by about 4.55 Bcf a day, or 14%. This marks the fifth consecutive quarter where volumes have surpassed the comparable prior period by 10% or more. On the demand side, deliveries to LNG facilities through our pipes reached nearly 1.5 Bcf a day for the quarter, up about 900 million cubic feet a day compared to the first quarter of 2018. Power demand on our system slightly decreased mainly due to warmer weather. Exports to Mexico increased by 183 million cubic feet to 3.2 Bcf a day, a 6% rise compared to the first quarter of 2018. On the supply side, production from the key basins we serve continues to grow. Permian Natural Gas wellhead volumes have risen about 30%, while Bakken volumes increased by around 31%. Haynesville saw a 29% increase and Eagle Ford an 8% increase. In terms of transmission pipe volumes, EPNG volumes were up 1.1 Bcf a day mainly because of Permian volumes. Rig volumes rose by 900 million cubic feet a day, and CIG volumes increased by approximately 550 million a day, both due to growth in the DJ Basin. KML volumes increased by 570 million cubic feet a day mainly driven by LNG exports. Our gas gathering assets also saw a 21% increase in volumes, or 570 million cubic feet a day, as a result of the production increases in Haynesville, Eagle Ford, and Bakken. Overall, the higher utilization of our systems, much of which did not require significant capital investment, led to notable bottom-line growth this quarter, and in the long term, as our systems expand, this will provide great opportunities for growth. Looking ahead to 2024, the Natural Gas market is expected to grow to nearly 110 Bcf a day, driven by increases in power generation, LNG, exports to Mexico, and ongoing industrial development, with most of this supply growth anticipated to come from the Permian, Haynesville, and Marcellus regions.

Thanks, Kim. So today we're declaring a dividend of $0.25 per share, up from $0.20 per share last quarter and in line with our budget to declare $1 per share for the full year 2019. As Rich mentioned, this would be a 25% increase over $0.80 per share compared to 2018. KMI had a good quarter. We grew significantly from last year's first quarter and we overcame a number of items to end the quarter in line with our budget. We generated DCF per share of $0.60 which is 2.4 times our declared dividend or over $800 million in excess of that dividend. Additionally, as the press release points out for the full-year 2019, we forecast our DCF to be on budget and that is even after incorporating the approximately $50 million impacts from our announced FERC 501-G settlement, so very nice overall performance from our underlying business. Turning to the earnings page. Revenues were in line with the first quarter 2018 but operating income was higher due to lower quarter-over-quarter costs. Net income available to common stockholders for the quarter was $556 million which is a 15% increase from the first quarter of last year. That includes the benefit of zero preferred dividend payments, down from $39 million we paid last year in the quarter as a result of the conversion of our preferred equity securities in October of last year. Adjusted earnings per share was up it was 25% up $0.03 or 14% from the prior period, very nice growth there. Moving on to distributable cash flow. We believe distributable cash flow is a good reflection of our cash earnings and it was up; it was $0.60 per share for the quarter, up $0.04 or 7% from Q1 of 2018. Natural Gas segment was the largest driver of that growth up $127 million or 12%. As has been the consistent theme for that segment recently, we benefited on multiple fronts. TGP benefited from multiple expansion projects placed in service in 2018. EPNG was up driven by Permian supply growth more than offsetting the unfavorable impact from the FERC 501-G settlement in the quarter. Texas and Louisiana gathering and processing assets were up driven by increased volumes from the Haynesville and Eagle Ford Basin. Kinder Morgan Louisiana pipeline was up due to the Sabine Pass expansion. Our product segment was down $4 million, our terminals segment was up $2 million, our CO2 segment was down $48 million or 20%, as Kim covered the drivers behind those segments performance for the quarter. Kinder Morgan Canada was down $46 million from Q1 2018 as a result of the sale of our Trans Mountain assets. Our G&A expense was lower by $6 million due to greater amounts of costs capitalized to growth projects as well as lower G&A resulting from the transition zone sale. Those items were partially offset by higher pension expenses in the quarter and those pension expenses are non-cash and are backed out of our DCF metric and replaced with actual cash contribution. Excluding the higher pension costs, G&A would have been $16 million lower than Q1 2018. Interest expense was $14 million lower driven by a lower debt balance and lower average rate on our bonds as well as greater interest capitalized to our growth projects. That was partially offset by higher LIBOR rates which impacted the interest rate swaps that settled in the quarter.

Thanks, Steve. Before I get into the results, I do want to update you on a couple of general business items. On the announced diesel export project, we received our required air permit amendment and key building permit to satisfy the key condition process that customer's contract. As such, we can now commence construction activities planned to do so in May. Consistent with previous statements, this is an approximately $43 million project that contemplates two new desolate tanks with combined storage capacity of 200,000 barrels underpinned by a 20-year take-or-pay contract that we expect to put in service during the first half of 2021. Of the shed six reactivation project that we discussed we expect to get our key building permit shortly which will allow us to start construction in May also and have the project in service in December 2019. As a reminder, the total CapEx on that project is approximately $8 million. Now moving towards the results and of note as I talk through the results I'm generally only going to reference results from continuing operations as discontinued ops only relates to prior periods and is less relevant. Today the KML board declared a dividend for the first quarter of 0.1625 per restricted voting share or $0.65 annualized which is consistent with previous guidance. Earnings per restricted voting share for continuing operations for the first quarter of 2019 are $0.12, and that is derived from approximately $21 million of income from continuing operations which is up approximately $7 million versus the same quarter in 2018. Revenue increased across most of KML's assets and was led by the contribution from the baseline tank and terminal assets coming online but was partially offset by the expiration of a third-party contract on ESRP which we've previously discussed. The increase in revenue was partially offset by higher G&A and depreciation. Total DCF from continuing operations for the quarter was $22.4 million which is down about $1 million from the comparable period in 2018. That reflects coverage of approximately $1 million and reflects the DCF payout ratio of approximately 85%. The coverage and payout ratio this quarter were skewed by the large cash tax amount of almost $21 million which is $14 million higher than the almost $7 million in the comparable period last year. As we previously discussed, we were not required to make cash tax payments in 2018 or 2018 operations but rather were able to defer them to this year. As such, we made a cash tax payment in the first quarter of $17.3 million for 2018 which is consistent with what we budgeted and a payment of $3.5 million for 2019 which together make up the almost $21 million. As we sit here today while we have not finalized the 2018 Canadian return, we believe the tax ultimately owed will be less than the $17.3 million that we budgeted and paid and that we'll be able to apply the excess to 2019.

Hi, good afternoon everyone. Are you able to answer any questions about the KML process, like the order? Does that mean anything?

The order?

The order in the press release has the three options; is it likelihood of success or preference?

I hear you, Shneur. So, no, beyond the press release as would be customary when you're running a process like this we're just going to run the process and really not comment beyond what we've said publicly in the release.

I have a couple of questions. You're spending $3.1 billion in capital expenditures this year, and you've added $600 million to the backlog. You recently stepped away from the DLCC Board opportunity. Where do you see additional opportunities to invest in capital expenditures over the next 18 months, in addition to your current position? Also, do you have an idea of what 2020 might look like in terms of spending? Will it be higher or lower than your expectations for 2019?

On the last, we're again continuing to guide to between $2 billion and $3 billion and we won't get to that finally until we do our budget for 2019. But I think to your first question as we mentioned in talking about what's going on in the Texas market and what's going on in Midstream generally, as Kim took you through the numbers there, we continue to see good opportunities in natural gas which makes up 70% of the backlog. We're seeing some opportunities here and there in refined products; continue to see small incremental opportunities there. As the year goes on, there is less coming in 2019 and we feel comfortable with kind of what we guided to in terms of discretionary CapEx at the beginning of the year as being where we will end up with it. But that's where the opportunities are coming from, that's what we expect for 2019, and we're working on 2020 and beyond as we speak to take the $2 billion to $3 billion as a reasonable guide.

Good afternoon. Just wanted to follow-up on the comments on leverage. You've seen some positive action from the ratings agencies but it does seem like balance sheet has shifted higher in the priority list for the public markets. Could you just provide an update as to how you're looking at the 4.5 times target and whether the strategy around capital allocation has shifted at all?

Sure. We think the 4.5 is the right place to be for our particular assets given the size, the stability of cash flow, the diversity of the businesses that we have, the quality of customers, the dividend coverage you put all those things together we actually map higher than BBB flat. And we think that all of those factors with respect to our business is what has made the rating agencies comfortable with the upgrades that they've given us. So we think the 4.5 times given all of those considerations is a fine place to be.

Thank you, Steve. Natural Gas had another strong quarter, increasing by 12%. Market fundamentals remain solid for 2019, with Lower 48 natural gas demand projected to rise by 5.5 Bcf to about 95 Bcf per day, and production expected to increase by 7.5 Bcf daily. The growth in the Natural Gas markets during the first quarter is resulting in favorable outcomes for large diameter pipes. Transport volumes on our transmission pipeline grew by about 4.55 Bcf a day, or 14%. This marks the fifth consecutive quarter where volumes have surpassed the same period last year by 10% or more. On the demand side, deliveries to LNG facilities through our pipelines reached nearly 1.5 Bcf a day this quarter, up approximately 900 million cubic feet a day compared to the first quarter of 2018. Power demand on our system decreased slightly due to warmer weather. Exports to Mexico increased by 183 million cubic feet to 3.2 Bcf a day, a 6% rise from the first quarter of 2018. On the supply side, production in the key basins we serve continues to rise. In the Permian, natural gas wellhead volumes went up about 30%, while Bakken wellhead volumes rose by around 31%. The Haynesville saw an increase of 29%, and Eagle Ford's volumes grew by 8%. Looking at the volumes on our transmission pipes, EPNG volumes increased by 1.1 Bcf a day, primarily due to Permian output. Rig volumes rose by 900 million cubic feet a day, and CIG volumes increased by about 550 a day, both driven by growth in the DJ Basin. KMLA volumes increased by 570 million cubic feet a day, largely due to LNG exports. On our gas gathering assets, volumes climbed by 21% or 570 million cubic feet a day due to the production increases mentioned earlier in the Haynesville, Eagle Ford, and Bakken regions. Overall, higher utilization of our systems, much of which occurred without significant capital expenditure, led to solid bottom-line growth this quarter. Looking ahead, by 2024, the Natural Gas market is expected to expand to nearly 110 Bcf a day, driven by increases in power generation, LNG, exports to Mexico, and continued industrial development, with much of this supply growth anticipated to come from the Permian, Haynesville, and Marcellus regions.