I'd like to introduce Steven Kean. He'll be doing about a 20-25-minute presentation on Kinder Morgan, then we will start our fireside chat. Around you will see note cards, as you've done probably in other presentations today, we welcome questions by note card. I'll turn it over to Steve.
All right. Thank you, Jean Ann. I also want to introduce David Michels, our Chief Financial Officer, who's here, and Peter Staples, Director of Investor Relations. Okay. I'm going to take you through, before we get into talking about the company specifically, a few macro scene setters here to help place our company in context. One thing is that people need to understand, we're going through an energy renaissance in North America. We are increasingly producing hydrocarbons, natural gas liquids, crude and natural gas in increasing quantities, and more of that is being consumed not only in the U.S. but internationally. We're seeing a growth in global demand, a lot of that concentrated in developing countries where we're continuing to penetrate, where people don't have electricity today, a billion people who don't have electricity today.
We're getting natural gas increasingly into the power generation stack, not just in the U.S. but around the world. There is growth, and a lot of that growth is coming from the U.S. Population growth, urbanization, economic development, they're creating enormous additional demand for energy commodities. Increasingly, that's coming from the U.S. We're growing our production of U.S. oil and gas by 33% between now and 2025. We're expecting to meet about 50% of the expected global supply increase through 2025, to the point where we're producing nearly one of every five barrels of oil and one of every four cubic meters of natural gas that's in use in 2025. What's important to a lot of these markets is energy security.
They have to be able to rely that they're going to be able to get the supplies, they're going to be able to get them timely, that they're not going to be interrupted. The U.S. offers something really unique, which is a very installed and robust infrastructure base, transportation and storage to get the energy commodities from where they are to where they're needed, including getting them onto a ship where they can reach global markets. We have a stable rule of law with enforceable contracts. Think of this. Think of the liquefied natural gas. Think of going to a country where you have to drill the wells, you have to install the gathering infrastructure, you have to build the processing plants, the treating facilities, the takeaway transmission infrastructure, maybe some supporting storage assets, and you have to build the liquefaction facility at the border, okay?
Think about that at the shore. Think about that versus the U.S., where we have millions of miles of upstream pipeline, 4 TCF of natural gas storage capacity, a private sector which will come to your doorstep, beating down your door to sell you the commodity. Transportation infrastructure companies like ours that can get it to the shore where it can get on a You can invest in liquefaction, and that's it to some extent, right? There's upstream expansion to be done from time to time, but really, that's what you get. You get competitive alternatives within that market, a reliable rule of law, et cetera. It's a good place for investment. It's a reliable place for you to source your supply. The U.S. is advantaged to serve as the preferred trading partner to meet those growing demand markets.
That means for a company like us, higher utilization of our existing infrastructure, but also the opportunity to invest in incremental capital expansion projects to help serve that growing demand. Our business has a decades-long runway. If you think about us in contrast to many of the other sectors and sectors that you may be looking into or studying or hearing about as you're at this conference, we have a decades-long runway. I think that's particularly true in natural gas, which is what we are weighted toward. It's increasing its role in power generation. It has an irreplaceable role in residential and customer heating, in industrial use, in petchem applications, et cetera, and its share of power generation is growing. We're producing it in greater quantities here. Here's how we play in this. We're a leader in energy infrastructure. We're weighted toward natural gas.
It's a little over 60% of our segment EBITDA at this point, but we're also in refined products and crude, which is also being exported in increasing quantities. We provide the pipeline and storage infrastructure for all of those commodities. We're connected to every major supply basin. We're a leader in each of our businesses, whether it's in natural gas or refined products. We're a leader in our businesses. We connect every major supply source with every major demand source, including those export markets. We touch about 40% of the natural gas that's consumed in the U.S., and again, increasingly that's going to export markets. What we have here is an unparalleled network of transportation and storage assets. They're irreplaceable. In many respects, they're simply must-run.
If the lights are on, if power is being generated, if factories are on and running, if people are heating their homes, if we're making petrochemicals and plastics, you need these assets to run. Very hard to replace and largely must run. Again, a leading position, primarily gas-weighted. Our role in all of this is to get the gas and other commodities from where they are to where they're needed. We generate a lot of cash flow in this business. This is comparing our distributable cash flow to our dividends. That excess cash flow, we're going to talk in a minute about what we do with that. You can see we have dividend coverage after growing the dividend by I'm sorry. After growing the dividend by 25% from 2017 to 2018 and again to 2019. We're growing that dividend, but we're covering it.
we're covering at a good multiple, and we still have plenty of free cash flow available to invest in additional projects or to buy back our shares. $2 billion for dividends, $3 billion available to us to enhance shareholder value. I think we're a core holding in any portfolio. Large cap company, investment grade. We've been upgraded now by all three rating agencies to BBB flat from BBB-. We have a 5% current dividend yield, 25% dividend growth in 2019 and 2020. On top of that, and in addition to our ability to invest in organic growth projects, somewhat unique in our sector, we have a share buyback program, $2 billion of capacity and $525 million that we've used.
In addition to thinking about the decades-long runway that we have in our business, we also have and our specific role in it as a infrastructure provider in that business. The way we've chosen our business model, the way we've chosen to secure our cash flows that are generated by that business is 60% take-or-pay. What we mean by that is people pay to reserve the space on our pipelines or in our terminal assets as reservation charges or as monthly warehouse charges in the case of terminaling assets. They are paying that whether they're using the space or not, and they're paying that regardless of what the commodity price is of the commodity that we are storing for them. Okay, 60% of our cash flow being secured under take-or-pay arrangements. Additional 25% is fee-based. That means we're getting paid a fee.
For example, for ancillary charges associated with blending in our terminal facilities or additional throughput that our customers want. Again, being paid a fee that is independent of what the commodity price is of what we're storing or moving. Where we have commodity price exposure, which is primarily in our enhanced oil recovery business, which makes up about 6% only of our segment EBITDA. We have hedged that oil price out into the future under a disciplined hedging program. That's 96% of our cash flow. Again, a business with a great runway, core infrastructure that's irreplaceable, and with economic moats, barriers to entry around it. With the underlying cash flows secured in many respects without regard to usage, meaning on a reservation basis, and without regard to the underlying commodity price. Then shifting over to the right-hand side with high-quality, creditworthy customers.
77% are investment-grade or have provided some credit support to us to secure the cash flows that we're getting. Stable underlying cash flows on a long-term stable business with good counterparties. Multi-year take-or-pay contracts and high-quality customers. Let's talk about capital allocation. We've spent the last several years getting our balance sheet to that BBB flat rating. We've retired about $8.3 billion worth of debt. We've reduced our debt to EBITDA multiple by a little over a turn over that period of time. We have substantial credit capacity that's available to us. Our long-term objective of getting that BBB rating, which comes along with the 4.5 debt to EBITDA, has been achieved. Which means that the cash that we generate, we have available to create value for shareholders. We're doing that in the dividend, as I mentioned, that's growing over time.
Over the long run, we'd expect to have well covered and grow at a rate that's more consistent with the underlying growth rate of our business. We have capital projects. We have a fairly elevated return threshold. It's hard to build energy infrastructure, so we have a return threshold that's well above our cost of capital to make sure that we earn compensatory returns on the capital that we deploy for our customers, and we have the option of doing a share repurchase. The way we make these capital allocation decisions is between our capital projects and the share buybacks is based on returns. We calculate the returns, and they're not quite the same thing. Investing in an individual project on an unlevered after-tax return basis versus investing in a levered portfolio of assets when you're buying back your shares of stock.
We look at those on a return basis as adjusted for those differences, we put our money in the place that we can generate the highest available return. We're strategic. We're not programmatic in how we're doing our share buybacks. We look for the best return, whether that's investing in a project or in repurchasing our shares. That's how we make our capital allocation decisions. I want to talk specifically about natural gas. I think people tend to jumble hydrocarbons all together, and natural gas stands out because it is abundant, but it's also clean and increasingly in demand in the worldwide market. We expect to see 35 BCF. If you think about today, we're about a 90 BCF a day market, 90 billion cubic feet a day of supply and demand of U.S. natural gas, adding another 35 BCF a day between now and 2030.
You can see the major basins where that's going to come from, and you can see our pipeline network overlaid on top of that. We are well-connected to where all this supply growth is expected to come from. The same is true on the demand side. U.S. natural gas demand is concentrated in the Texas Gulf Coast, where we have a great position. Of the demand growth that's forecasted for the United States, 70% of it is in Texas and Louisiana, and that's largely a function of exports, LNG exports, also exports to Mexico, petchem growth, industrial sector growth, et cetera. 70% of that demand is happening here in Texas and Louisiana. That's important because those are places where it is easier to get infrastructure done. It's easier to get energy infrastructure. There are pro-development environments.
There's a lot of the economy in both of those states that is dependent upon development and exploitation of the hydrocarbon resources. It's right where our network is concentrated. You put those last two pictures together, massive supply growth happening in the Permian Basin in Texas, massive demand growth, particularly export, but other, happening on the Texas Gulf Coast. We have the pipe that connects them. We're building the pipe that connects them, the supplies there to our network in the Texas Gulf Coast. The price for gas in the Permian today is negative. It was a negative $1.60 yesterday. A little better than that today. That means people are paying to get rid of their gas. People are paying to get rid of their gas, and they're doing that because they're trying to unlock the value.
The gas is associated with the production of more valuable crude and NGL. The two projects that I'm about to share with you, the value of the gas that's moving through those projects is $4 billion a year once they get built, assuming a $3 gas price. Assuming a $60 crude price, the associated value of the crude and the NGLs is $40 billion a year. Staggering numbers just in and of themselves, but it tells you why people are willing to sign long-term contracts to underwrite the infrastructure that we're building from the Permian Basin to the coast of Texas. When it gets to the coast, it interconnects with our five BCF a day Texas intrastate natural gas pipeline network, where we can distribute it out to the domestic consumption markets as well as the export markets.
We can connect what's essentially a waste product that's being produced for less than free, and connect it up to growth markets in Texas. We can do that without having to get Federal Energy Regulatory Commission approval because it's all within the state of Texas. An attractive permitting environment and the ability to get those projects permitted and sited and completed more quickly. Massive supply growth that we're connected to and massive demand growth, and a lot of it happening on the Gulf Coast. We have $6.1 billion of commercially secured capital projects underway. This is what we refer to as our backlog. There are many more projects beyond the backlog that we are looking at.
What gets them in the backlog is that they become high probability, meaning we have them under contract, maybe under construction, maybe we're waiting on a permit, but they become high probability projects that we expect to do and get done. If you look historically at how that's worked, they are projects that we tend to get done. It's split 70% to natural gas. That natural gas investment of about $4.3 billion is at about a five and a half EBITDA multiple. Attractive returns for the capital that we're investing. Actually, I'm going to skip ahead here just to show you a bit on the track record here on our capital investments, because everybody talks about this.
Here, what you see on the right-hand side of this chart, and this is in the appendix of the presentation, is on the left side bars, that is in the gray, what our original EBITDA multiple was when we approved the project, and the red is what that turned out to be. We improved across the board. We've especially done well in natural gas. This is hard to do. It's hard to site infrastructure in the U.S. Now you've got to allow additional time for permitting, allow additional cost for outreach and other work that you have to do, and we have a good track record here with the capital that we invest. Okay, this is on the gas side. It's a combination of producer push, supply push, that's what we're doing in the Permian, and demand pull, which is what we're doing for our LNG customers.
We added about $600 million worth of new projects in the first quarter, $400 million net after the projects that we placed into service during the quarter. We expect, and this is based on our historical performance as well, we expect that we're going to be able to find $2 billion-$3 billion worth of capital projects to do every year. Oops. Okay. Here's what I was talking about in the Permian Basin. We have 2 BCF a day pipeline projects that we're building out of the Permian. One expected to go into service in October of this year. The second one coming into service about a year later. What the producers are doing with their gas out there today is flaring it, or they're selling it at negative prices. We've secured these projects, both of them with 10-year contracts. Both are about 2 Bcf a day.
The first one, Gulf Coast Express, is a $1.75 billion project. The Permian Highway Pipeline, the second one, is $2.1 billion. What you see in the red here is the existing infrastructure that we have that's serving the Permian producers as they're looking for ways out without us having to build new pipe. That's our existing network. Here you see the growth in the LNG markets. Our pricing in the United States has been pretty stable, and the outlook is good because of the producer economics. We expect to see growth of 9 Bcf a day or I'm sorry, 11 Bcf a day between 2018 and 2025. We're expecting to exit the year this year at maybe 8 Bcf-9 Bcf. We entered the year at about 3 Bcf. Really dramatic growth here. Think about that over the 90 Bcf a day base.
We're supporting LNG in a couple of ways. One is that we are providing the upstream infrastructure, and that's really kind of the primary way. 5.7 Bcf a day of transport capacity, 19-year average contract life to build to support other parties' LNG projects. We're also building out. The inset here is we're building out our Elba liquefaction project. That's a project where we're the ones building the liquefaction capacity, and we're commissioning our first unit as we speak. This is under a long-term contract with Shell, 20-year contract with Shell. They're the company. They'll take the commodity price risk of it and place it in the international market as part of their global portfolio of LNG. We're participating in the business in a way we like to participate.
We're selling terminal services for a fee here, or we're selling upstream transport and storage capacity to customers at these LNG facilities, third-party LNG facilities, again, for a fee, reservation-based fee. On Elba, we're commissioning now. We have experienced some technical issues, none of them particularly significant. We have had cool downs and restarts. I mean, the good news is that on the cool downs, we are making LNG. We're getting closer there, and we'll announce when we've got that first unit in service as soon as we get there. In commissioning now. Okay, beyond the backlog, Marcellus and Utica takeaway growth. Storage that supports renewable. It's the cheapest storage there is, much cheaper than battery storage to use a natural gas storage facility in conjunction with an electric generation facility. Also to support sometimes intermittent LNG exports or operational fluctuations in NGL exports.
Access for the Permian transport for takeaway for LNG exports. Overall, in North America, $800 billion of infrastructure, $400 billion in kind of the natural gas transportation storage and other almost $300 billion in gathering and processing. A great set of opportunities and a great network in order to be able to take advantage of them. We look to be very, very good operators. It's important to us to be safe, reliable, compliant operators. There have been a number of things that we've consistently beat our industry averages, and we beat them on almost all of the metrics. That's one thing we track. Another thing that we track is our emissions level. We have been able to reduce, and these, I'll give you the kind of the country, the whole national look.
We've reduced greenhouse gas emissions because we've just been displacing coal in the power sector back to 1992 levels. Okay, that's extraordinary. We've reduced overall greenhouse gas emissions as a country since 2007 because natural gas has taken away market share from coal. We've reduced methane emissions by 16%, even though the amount of natural gas produced has increased by 50%. This is something that we've been trying to explain to the ESG community, and it's a remarkable story, a remarkably good story. This is something that we can export around the world. If we can displace Chinese coal power plants from getting built, we can not only reduce greenhouse gas emissions, but we can also clean the air. This is a good public policy move, more and more use of natural gas. We're playing our role in it by being a leader in methane emissions reductions.
Couple of summaries here. If you look through the S&P 500 company, you screen for the two balance sheet metrics that are shown at the top. Net debt to EBITDA below five times, investment grade. Our market cap, our overall size, our EPS growth projected from 2018 to 2020, our dividend yield, and our dividend growth. We're the only company that fits all those screens. We think we have an attractive value proposition which provides upside versus the S&P median, and our yield is certainly superior to the S&P 500 median. I think on some more macro financial factors, we should screen well. In conclusion here, a compelling investment opportunity, 90% take-or-pay or fee-based earnings, $8 billion adjusted EBITDA, 5% dividend yield, 25% dividend increase. I want to talk about this, a highly aligned management.
Management and the board own 15% of the company, which is unusual for a company of this size. That works its way through how we run this company every day. I think that it's important for people to focus on the culture of a company and how it makes decisions and how it operates. We operate like owners, not like agents. We manage this company like owners, not like agents, which means we are disciplined about how we return the capital. We're detail-oriented and focused on how we're performing, whether that's commercially or operationally or financially. It shows through in everything we do. We run a big machine here, and we run it like a machine. Our management system is like a machine.
There are things that we do every Monday, every week, every month, every quarter, semiannually, and every year, where we are setting objectives, assigning accountability, tracking our progress, meeting and making adjustments to those as we go, making sure that we're projecting what we're making in the month, the quarter, and the year, and updating that every week, so we have an objective discussion about what's changing in our business. Asking ourselves at the end, "Did we book what we forecasted? Did we collect what we booked?" All of those things go hand-in-hand with being a management-owned company and in running a very disciplined operation, from capital deployment to how we operate our assets. We run this thing like a machine. We don't run ad hoc. We're not waking up every day wondering what's coming at us. We've got our year 60% scheduled by the time we get into it.
Right? We're handling things in a very methodical way, including looking ahead on what we see coming in our business and how we're going to position ourselves for it. I think that that culture and that management style is a reflection of our ownership and our action as owners, not as agents, as principals. I think that's the way to run any business, but it's certainly the way that we run ours. I think it's an important consideration for any investor. With that, we'll take your questions.
I will head back up here. Again, if you have questions, there are note cards, and we will have people coming around to pick them up. I have a few to get us started here. You can raise them up, or we can take questions from the audience as well. Do you have a question that you'd like to start with?
Yes. Right. Okay. We have a CO2 business, and that business is really two businesses. One is the transportation and sale of the CO2, which is a geologically sourced CO2, which is used in enhanced oil recovery operations. We have pipelines, like our other pipeline businesses. We have pipelines. We move it from where it is in southwest Colorado into the enhanced oil recovery operations of us, as well as third parties in West Texas. That's that part of the business. Of our total segment, EBITDA, the pipeline part of that business is about 4%. The EOR, the enhanced oil recovery part of that business, is about 6%, which is down as a share of our portfolio by about half from what it was a few years ago, as other parts of our business have grown. It's a good business for us.
We get good returns from that business. We have high return thresholds for that business. I'm talking really about EOR now, because it's that 6% that looks different from the rest of the portfolio. We get good returns. We demand good returns in that business because it is commodity price exposed. Over time, our track record there has produced very good returns. It's a niche business for us. We got into the EOR business because we had the CO2 and the pipelines to get it there. We've developed a good EOR team, and those are two precious commodities, the CO2 and the EOR expertise to be able to turn the CO2 into oil. Again, it's a niche business. That piece of it, the EOR piece, doesn't look like the rest of our businesses, but it produces good returns. We're happy to own it and continue.
It's become a smaller share of the portfolio overall. With respect to whether or not we would ever part with it, like any business that we own, we would sell it at the right price. Now, getting the right price probably means, because that business, it would be dilutive on a DCF per share basis. You'd have to be convinced, we'd have to be convinced on behalf of our shareholders, that the multiple on the remaining businesses would be elevated by enough to make our shareholders better off the day after than they were the day before. Right? That's the challenge. It's a limited market. There are only a handful of people who do it. Getting a price that's adequate and that we're convinced is going to work is challenging. In the meantime, we get good returns, and we're happy to own it.
It attracts a different valuation multiple for oil production, certainly, than what we would get for long-haul pipelines. We are very transparent. We show what it is and how it works, we think people have the tools with which to value it.
I could actually ask one more follow-up on the CO2 business. Sometimes investors, when you mention that there's not that many people that do it, they'll say, "Oh, maybe private equity could buy it.
Right.
Do you actually feel like that's realistic and that private equity would be capable of operating an asset like that, just hypothetically?
It's possible. It does take a certain expertise that people need to get comfortable with. Then, I think it's safe to say that private equity is aggressive enough that if they had interest, they'd be expressing it.
Okay. Fair enough.
It's not been the target for most private equity investments. More focus has been on the shale.
Yeah. That makes sense. If you have questions on Notecard, please raise your hand and we will pick them up. I liked the slide that showed how much take-or-pay you have in your portfolio. I think it's actually the most take-or-pay of anyone in my coverage, which makes your assets generally very defensive. Is that on purpose? Is there a target of take-or-pay that you like to have in the portfolio?
What we typically do. You could, I suppose, just sell transport capacity on a short-term basis, right? Where that's the only opportunity is to sell whatever's remaining on a short-term basis, that's what we do. Our preference would be to secure our cash flows with long-term take-or-pay arrangements. It's not that we're setting a specific target, it's that we normally just want to do it that way.
Got it.
The other thing is, if you think about the way the transaction form for interstate natural gas, the way it's been done over the years has been reservation fee based. That's a function of the way the Federal Energy Regulatory Commission has designed rates and services. Most is on a straight-fixed-variable rate design. You pay for the capacity you reserve and the variable charges. There are some differences, but variable charges cover variable costs.
Yeah. I feel like even on your liquids pipeline, you've done a very good job of getting 90% take-or-pay, which is much more than-
Right
a lot of your peers.
That's true. We don't typically take the commodity risk. We'll sell the capacity, and the customers will take the commodity risk and upside, and that was purposeful.
Okay. Does Kinder Morgan's track record of delivering projects from backlog below prospect expectations or with higher EBITDA performance, I think that's referencing that slide-
Right
suggest that your growth aspirations are too conservative?
It's a good question. We do purposely maintain a good bit of headroom above our weighted average cost of capital. Are we foregoing opportunities? We ask ourselves that, and probably some. On the other hand, but modest. Most of where we're deploying our capital is on our existing network where we are able to command fairly good returns. Being well above our weighted average cost of capital, I think is a reflection of conservativism around the difficulty of building infrastructure, permitting it timely, all of those things. We want to have a nice risk premium that we're getting paid for to make that capital investment decision. The other is we've been in a self-funding model now for several years. We haven't issued equity since 2015. We've been self-funding our capital investment projects really since the end of 2015.
All but a very small part of our project capital investments for 2019 are covered by internally generated cash flows. When you're doing that, you're always thinking about what's the highest, best use for our cash, and that includes taking into account things like share buybacks. We've set a lot of headroom there. We ask ourselves, is that too conservative? What we'll do with that, for example, on Gulf Coast Express and Permian Highway, we talk about a 15% unlevered after-tax return hurdle. What we talk about with our business development people and our business unit presidents is, look, we'll flex off of that. We'll flex up on that for CO2. We'll flex down on that for projects that we have long-term creditworthy counterparties on for securing that capacity on a take-or-pay basis.
We flex down off the 15% to get what needed to be done to get Gulf Coast Express done, as well as PHP. Those are still both solid double-digit unlevered after-tax returns, that's an example of where we will show the flexibility rather than just mechanically adhering to a return hurdle that's going to cause us to miss opportunities.
Why is the dividend so high given the amount of opportunity for capital reinvestment? I had a similar question in my list actually, which is that some of your peers have slowed their dividend growth and believe that the market doesn't pay them for dividends.
Is that something that you guys feel as well?
Yeah. We've really tried. As you know, there have been a lot of things that have been in vogue. Whether it's dividends or share repurchases.
Yeah
Where's your growth coming from, et cetera. We've tried to just focus on making money for our shareholders. We believe that when we set the dividend and we set the dividend growth, we did it looking at, okay, where did we need to have the balance sheet, and what will we have that's excess that we think is reliably in excess of other things that we could use that cash for? That's where we set the dividend. What's beyond that is really what we think we're going to have available in terms of project investments, and I think we've dialed that in fairly well. If there's surplus beyond that, we can repurchase shares.
We do believe in investing our capital in high NPV projects, and then to the extent that there's excess cash, returning that value to our shareholders and letting them figure out what to do with it, rather than building up some kind of a cash pile.
Is it fair to say that the way that your stock price reacts to the dividend step up over the next year might inform future dividend policy?
Yeah. I think the two principles that I mentioned that we'll adhere to is we'll want to have a well-covered dividend. A well-covered dividend means that you don't have to forgo capital projects where you might be subject to the vagaries of the capital markets, right? If you have a dividend that doesn't allow you to self-fund, then you have to rely on capital markets to invest in projects that you think are attractive. We try to stay out of that. That's a lesson learned from 2015, when we saw our cost of equity rising, and we made the decision to self-fund. I think well-covered principle number 1, and then I think principle number 2 is a growth rate that looks more like the growth rate of the underlying business over time.
Yep. What confidence do you have that we won't see dividend cuts again, or perhaps said another way, is there a scenario with the commodity markets or something that could lead to a dividend cut?
When we were making the decision on the dividend outlook in 2017, we made it being confident that what we had was truly excess to balance sheet and other needs, and that's where the coverage comes in. The way we contract also insulates us from those commodity price turns. I've been in this business for about 35 years, and the last time I recall seeing something like what we experienced in 2015 and 2016 was back in the mid-'80s, when oil prices crashed and the industry was going through massive restructuring. That was a pretty profound event, just like the rapid adjustment that we saw in commodity prices following the OPEC meeting in 2014 was a pretty profound event. If you think of that as that's kind of a once every 30 year thing, then midstream generally is pretty insulated from that.
We have taken, obviously, the further step of securing more of our cash flows under reservation and take-or-pay based contracts. We feel good and felt good about the dividend and the outlook for the dividend when we set that three-year guidance back in 2017.
Yep. Okay. Distributable cash flow, DCF, often means discounted cash flow to potential investors. Would you consider moving to more standard metrics?
Yeah. We've been presenting more metrics. People clearly you see GAAP earnings, you see our EPS, and we've talked in terms of cash flow from operations, which is a more familiar measure in many respects. I think there are a couple of things that in our sector, and our business in particular, that create a divergence in terms of measuring economic value, a divergence from EPS or book earnings. One is depreciation versus the capital that you need to invest in order to maintain your assets. A lot of our assets are pipe underground. They're very capital intensive, but it's steel, it's coated, it's protected. It can last indefinitely. It's not cast iron pipe in Manhattan. It's long-lasting assets.
We invest OpEx in testing that pipe and finding where there are pieces of it that need to be replaced, but that's where it shows up, in our OpEx. The capital that we need to invest in an ongoing basis to maintain an asset like that is nowhere near what our book depreciation is. That creates a big divergence in economic value between book earnings and what we look at, which is more based on distributable cash flow. Now, again, we're showing some other metrics too, but we manage our business on distributable cash flow. Let me tell you what I mean by that. We want to look at what will our Well, I should cover the second place where it diverges is in a company like ours, where we are consistently investing capital and getting the benefit of accelerated depreciation and the like.
Our capital investments are pushing off the day when we become a cash taxpayer. There's a divergence between book and cash tax, and that's the second really big delta. We think that DCF, which is what we use to manage the company. What's the calc? The net income that's coming in, add back the depreciation, subtract the capital that we need to invest in order to maintain that business, in order to determine what we think we're creating in economic value. Minimize, not minimize, but truly invest in your maintenance capital, what you need to make a safe asset, a reliable asset, and a compliant asset. Don't just reinvest your depreciation. We don't have a utility mindset-
Yeah
about that.
KMI has been internally focused largely during recent years. What is the company's current thinking on re-engaging with M&A, and what are your M&A priorities?
Okay. We've never really stopped engaging on M&A, obviously relative valuation differences have made that difficult in more recent times. We continue to look at, and the kinds of things that we're interested in are the kinds of assets that we're in today. Assets that look like what we operate today, that are contractually structured the way our assets are contractually underpinned today, and where we can bring value, either commercial synergies, cost savings, which we can almost always produce, or capital synergies. It's really the set of things that we're in today, we like, that's the kind of thing that we're looking for, rather than saying, "Well, I got to be in that particular basin," or, "I got to be in that place." Then it comes down to what's actionable.
How does the value of KMI's network change or not in a world where 50%-70% of passenger vehicles are EVs in 10 or 20 years?
Yeah. Not much. Not much. Part of that is around the natural gas story. Incremental natural gas will be used to power electric vehicles. The other thing, we do move refined products, and we are exporting refined products now. Our domestic demand for refined products on our asset, domestic demand is 0.5%-1%. We look at EVs and look at them fairly regularly. There's a few million of them. There's 1.4 billion vehicles on the market. Look, we are very attentive to what's happening in renewable energy and how do we position our business for that. Backstopping it, helping its reliability, selling deliverability as opposed to moving transport on specific molecules. Those are all things that we keep a close eye on.
It's unfolding slowly. I think there's a broader market perspective, you got to study it carefully, you got to listen to the people who get paid to be right, not the people who get paid to be interesting.
Yeah.
I think when you get into those fundamentals more, you see that it is a slower-moving boat than people are projecting. Sometimes they're ignoring important metrics like vehicle miles driven. There's some ridiculous amount of additional kilometers of roads being built every day in India. They're not going to hit 13,000 miles a year like we do, but there are some other factors that are affecting that. I think this is a long road, and you have to also ask about price. You might afford a Tesla, right? A lot of people are going to be price sensitive.
Not me, not in Manhattan.
People will be price sensitive, right? You have to take that into account as well. The part of our business that it would affect is really the refined products transportation part of the business, and I think that's over a very long period of time, and we're gradually working other things into that mix. Like we transport ethanol. We do other things there. A slowly unfolding process, I think. The other thing, people have seen so many industries so massively disrupted, and disrupted effectively by code. Pounding out code to make something more efficient or offer a service a different way. These are fixed assets that are not easily replaced. Massive amounts of capital required and massive amounts of energy that need to be produced in order to move you and me around in a vehicle, right?
Someone once compared it to if we experienced the same efficiency in the internal combustion engine, it would have to be the size of an ant.
Right.
There would have to be breakthroughs at the theoretical physics and theoretical chemistry level to produce the pace of disruption that people have seen in other industries. The difference between perception and reality in our business is not just lines of code.
Can we talk a bit more about the Canada asset review process? It seems like good assets, but kind of small as a standalone.
I'm not knocking you, but if you'd had perfect hindsight going back, would you have maybe folded it back in right after selling TMX? Or perhaps never set up a standalone at all if you had.
The folding in part of it has to do with KMI buying it in, and it's about 2% of KMI's consolidated EBITDA, so it is a small entity in the scheme of things. However, it has to work for KMI shareholders who were focused on the balance sheet and focused on what the multiples are and generating accretion. KMI was extremely constructive in that process in terms of dealing with the asset that made it difficult, which was Cochin, which is kind of split at the border between the two entities.
Yeah.
KMI was open to a lot of different alternatives. It is a good set of assets, and I think what led to people's surprise, if you will, is while we said from the very beginning, "We can run these assets separately. It's a good set of assets that we put together over the years up there, and we're happy to run it separately. We don't have to do a deal that we don't like.
Yeah.
Right? I think people looked at it and said, "Well, yeah, it's small, and it's also pretty straightforward to understand, and it's attractive. So why don't you just auction it off?" Why doesn't that work? Well, there were rights of first refusal, there was the Cochin issue. There were other things that started to turn every bid into a unique deal, right? We ran a very exhaustive process, and now we have a nice option. We can keep running this business. We're comfortable running it. We've got $50 million of capital we're deploying up there. We've got additional capital projects that we've identified on the horizon. We can look at other combinations down the road that help give it scale.
We've got an option to just keep developing this business and do more with it in the long run. We didn't have to take a deal that we didn't like, so we didn't.
Okay. Let's see. Have you seen your investor base change significantly over the last four years? If so, are the requests and needs of the newer investors different than from before?
I would say we've seen, certainly when we did the consolidation transaction and became a C corp, we had fewer MLP retail investors, we rotated more into institutional investors. The way that has changed, people are still interested in the same underlying value questions. I think there is more focus on GAAP metrics and other metrics, how do I compare with other things in the portfolio rather than I'm a midstream specialist, I know what I'm looking for, you've got it or you don't. I think there's been more focus there. There has been more focus on ESG considerations, I would say. That's why we did an ESG report, we take that very seriously, we continue to evolve that. Otherwise, people look for growth, leverage, dividend outlook, how you deploy capital, et cetera, all those same things.
Maybe as a final question, in looking forward over the next decade of Kinder Morgan's EBITDA growth, would you say that that should be most tied to gas growth in the U.S.? If you think gas is going to be 2%-3% growth, that Kinder Morgan's long-term growth should be something in that ballpark?
We're weighted to natural gas, natural gas growth elevates the value of the existing network and creates growth opportunities. Just directionally, the fortunes of gas are something that our business model is purposely very much tied to and our future investment is very much tied to. If you look at our other big commodities, refined products, that's going to grow. We're growing our exports.
across our docks in Houston, we exported 300,000 barrels a day in the fourth quarter. That's staggering. We used to import.
Yeah
over those same docks. We're exporting refined products, and we're seeing domestic consumption still at 0.5% to 1% growth. Crude, we're invested in crude. That's more a function of the specifics of the individual pipeline asset and contract renewal and the rest, but we're participating in that business and increasingly participating a bit in NGLs as well. I think you're directionally right, that natural gas is what we've hitched our wagon largely to, and we like its prospects and how we're positioned for them and how we can grow there.
Great. Well, thank you so much, and thank you for the participation.