Kinder Morgan, Inc.

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. Rich Kinder, Executive Chairman of Kinder Morgan.

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. 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 Kendra 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. As I've said ad nauseum, 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 second quarter. 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 were 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. That said, we are finding good opportunities to grow our pipeline network, as demonstrated by our recent announcement of the expansion of our permanent 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 in 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 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 you know 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. Specifically 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 in explaining our story to you and to all of our constituents.

Steve? 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. Gathering and processing is also strong, up versus planned 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 roll-offs, 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. 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. Second, in CO2, SACROC 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. 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 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. 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. Second, we invest in attractive opportunities to add to the value of the firm. We have found some incremental opportunities and expect to invest about $1.5 billion this year in expansion capital, and notably, we added an expansion of our Permian Highway pipeline. We picked up MAS Energy, that's M-A-S, 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 to our investors in the form of a growing, well-covered dividend and share repurchases. So far this year, we have purchased about 16.1 billion shares while raising the dividend 3% year-over-year. As we look ahead, we have a $2.1 billion backlog, 75% of which is in low-carbon energy services. That's natural gas, RNG as well as renewable diesel and associated seed stocks in our products and terminal segments. 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 percent share, and in natural gas storage, which is highly cost-effective energy storage in a market that will continue to need more flexibility. 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.