KMI - Kinder Morgan

[LearningMachine]

The whole world blows up if interest rates go up fast, no? There's debt everywhere. So government options are either keep interest rates low, or print money (inflation), or both. Is there anything different about the risk to KMI than every other levered real estate company and individual? I guess long-term contracts lock in pricing for some of their volume.

 

The cancellation of the Keystone XL pipeline is probably a neutral. Upside is consensus is no new interstate pipelines will be built (which makes no sense since they're the cleanest way to transport, but oh well), downside is growth opportunities will be limited.

 

JayGatsby, you hit it right on that high interest rate scenario will also impact other levered real estate companies and individuals with relatively shorter-term debt.

 

With KMI, if you watch video recordings of the last few sessions on the investor site, one message that I took away is that we also cannot totally ignore the risk of utilities renewing at lower rates.  Steve Kean admitted that there will be renewal headwinds in 2021 and I believe also into 2022 in one of the videos.  I also hear their story that with renewables, utilities still have to have natural gas as fallback.  True, but that natural gas as fallback can also be provided through nearby storage when overall usage is much less, i.e. only on fallback days instead of having to sign a long-term contract with interstate pipeline.  The point is earlier the utilities had no option but be at the mercy of signing a long term contract with the interstate pipelines.  Now, they at least might have another option to consider to provide fallback option. I believe KMI did admit in one of the videos that it is already starting to happen in CA to some extent.  I think if the Biden administration does end up requiring plans for carbon-free electricity by 2035, the trends to make plans to use natural gas only as backup will accelerate to some extent.  So, the terminal value might go down sooner with the new administration.  Anyway, exports growth should provide some upside here as well.  This is why I didn't bring this up as the top issue.

[JRM]

Carbon free electricity in the United States isn't happening by 2035.  Not a chance.  Not unless somebody figures out a fusion reactor design that is economical.

[LearningMachine]

Carbon free electricity in the United States isn't happening by 2035.  Not a chance.  Not unless somebody figures out a fission reactor design that is economical.

 

Fully carbon free electricity doesn't have to happen for utilities to be able to renew at lower rates as they are already able to start renewing at lower rates if you listen to last few videos.  Some small steps to go in that direction and plans to get there can help negotiate better long term contracts too.  Stopping plans to build new natural gas power plants can help utilities too. 

 

Steve explains in one of the videos that the transportation pricing in contracts is based on natural gas pricing difference between origin and destination, and that difference has been going down presumably because of extra natural gas supply getting into the areas through other pipelines but not being used fully because of other power generation options.

[thepupil]

LearningMachine, given your view on rates, I am curious your % invested and what companies/assets meet your underwriting (what do you own?).

 

[JayGatsby]

Stopping plans to build new natural gas power plants can help utilities too. 

https://www.powermag.com/pennsylvania-site-latest-gas-plant-online-in-building-surge/

https://www.eia.gov/dnav/ng/hist/n3045us2m.htm

 

Are there any indications that natural gas consumption by power plants is going down?

[LearningMachine]

Stopping plans to build new natural gas power plants can help utilities too. 

https://www.powermag.com/pennsylvania-site-latest-gas-plant-online-in-building-surge/

https://www.eia.gov/dnav/ng/hist/n3045us2m.htm

 

Are there any indications that natural gas consumption by power plants is going down?

 

Yes, you can see natural gas consumption by power plants start to go down in California already here: https://www.eia.gov/dnav/ng/ng_cons_sum_dcu_SCA_a.htm

 

You can also listen to Steve talk about basis differentials collapse for two assets up for renewal in a challenged environment at 4:55-5:23 here:

https://attendesource.com/profile/web/index.cfm?PKwebID=0x78433505b&varPage=home

 

Looks like Ruby might be impacted by CA demand slowdown but FEP is impacted by another pipeline in the ground and gas price being low.

 

Based on the chart you shared looks like natural gas consumption for power plants has been going up in the U.S. overall so far.  Wondering what would happen to the price differentials for other assets if the rest of the nation starts taking more baby steps towards what California is doing.  I understand it won't happen overnight and will take years and decades, but Biden administration will likely help accelerate the baby steps a little bit to not fully replace natural gas but reduce its consumption a bit by encouraging other power sources to start impacting price differentials for new contracts.

 

Wondering if Berkshire made Dominion sign a long term contract as part of the purchase to protect itself.  Without knowing more, my guess would be probably.

[JRM]

California is probably a very instructive model for what the Green Washers in DC want.  California currently imports around 30% of their electricity as they've shut down San Onofre Nuclear Generating Station and are going to close Diablo Canyon Nuclear Station in the next few years.  States that are closing down nuclear are replacing it with natural gas. 

 

According to the link below, 90% of the in-state electricity generation in California was natural gas (as of 2018).  New York is a similar story where they have also shut down Indian Point nuclear units and are replacing the generation with natural gas.  Doesn't make for a pretty ESG headline, but that's what is happening.

 

https://en.wikipedia.org/wiki/Energy_in_California

[KJP]

California is probably a very instructive model for what the Green Washers in DC want.  California currently imports around 30% of their electricity as they've shut down San Onofre Nuclear Generating Station and are going to close Diablo Canyon Nuclear Station in the next few years.  States that are closing down nuclear are replacing it with natural gas. 

 

According to the link below, 90% of the in-state electricity generation in California was natural gas (as of 2018).  New York is a similar story where they have also shut down Indian Point nuclear units and are replacing the generation with natural gas.  Doesn't make for a pretty ESG headline, but that's what is happening.

 

https://en.wikipedia.org/wiki/Energy_in_California

 

There's also been a very large ramp in NG usage for electricity generation in the Southeast.  Look at the last five years in, for example,  Georgia, Florida, North Carolina, South Carolina, and Virginia:  https://www.eia.gov/dnav/ng/ng_cons_sum_dcu_SVA_a.htm

 

Similarly, Marcellus gas in, for example, Pennsylvania and Ohio:  https://www.eia.gov/dnav/ng/ng_cons_sum_dcu_SPA_a.htm

 

Looking at those numbers, Transco + Marcellus takeaway (i.e., Williams) still look like good assets.

[petec]

I keep looking at this and finding just enough to worry about to stop me buying. Personally prefer Cheniere, which has long term contracts, better growth prospects, and is cheaper.

[Gregmal]

LearningMachine, given your view on rates, I am curious your % invested and what companies/assets meet your underwriting (what do you own?).

 

I tend to wonder this as well sometimes.

[JRM]

I keep looking at this and finding just enough to worry about to stop me buying. Personally prefer Cheniere, which has long term contracts, better growth prospects, and is cheaper.

 

The gas has to get to the export terminals somehow.  I believe I heard on the KMI CC that they supplied 40% of the gas to export facilities in the US.  They also own Elba Island.

[petec]

I keep looking at this and finding just enough to worry about to stop me buying. Personally prefer Cheniere, which has long term contracts, better growth prospects, and is cheaper.

 

The gas has to get to the export terminals somehow.  I believe I heard on the KMI CC that they supplied 40% of the gas to export facilities in the US.  They also own Elba Island.

 

Sure, but none of those factors has a (direct) impact on which stock will do best.

[lnofeisone]

 

Yes, you can see natural gas consumption by power plants start to go down in California already here: https://www.eia.gov/dnav/ng/ng_cons_sum_dcu_SCA_a.htm

 

You can also listen to Steve talk about basis differentials collapse for two assets up for renewal in a challenged environment at 4:55-5:23 here:

https://attendesource.com/profile/web/index.cfm?PKwebID=0x78433505b&varPage=home

 

Looks like Ruby might be impacted by CA demand slowdown but FEP is impacted by another pipeline in the ground and gas price being low.

 

LearningMachine - I mentioned Ruby to you back in November. It's probably the diciest of the pipelines that KMI has and they've been pretty clear about that for some time now. That pipeline has a lot of spare capacity (30% or so) and will have even more in the next year or so. If that pipeline will cease being profitable, I think the value of shifting debt to JVs will be more appreciated.

 

California has been shifting away from fossil fuels for some time now. You can see that in their emissions reports (on EIA). They've also been importing their energy from neighboring states that use nuclear and nat gas. Someone please explain to me how all 50 states can use this strategy?

 

Also, worth noting that a lot of energy projects in California (like the one by 8minute energy in LA) are all headline numbers. The price that is in the headline and the actual price that consumers will pay is vastly different. It's the same idea of why wind-generated energy in NE goes for $120/MWh on a PPA but $30 on a market. Most people are too lazy to get the actual PPAs and read them.  There is a reason why California's electricity prices have climbed 30+% in the last decade while the rest of the country budgeted maybe 5%.

[longlake95]

What's KMI worth?

[JRM]

What's KMI worth?

 

Currently it appears to be worth about $69B.  Probably pretty close to intrinsic value based on cash flows, eps, etc.

 

I think where it is interesting is if investors start to value KMI and other midstream companies based on a dividend discount model; then it is potentially undervalued. 

 

Lastly, the Price\Book ratio is not reflective of the replacement cost of the pipeline assets.  Many of these pipelines were put on the books 50+ years ago and are largely if not completely depreciated.  Not only has installation cost risen dramatically, but government obstructionists are making it increasingly difficult to build new pipelines.  These pipelines are critical infrastructure necessary to ensure national security.

 

 

[LearningMachine]

Lastly, the Price\Book ratio is not reflective of the replacement cost of the pipeline assets.  Many of these pipelines were put on the books 50+ years ago and are largely if not completely depreciated.

 

KMI actually increased its basis when purchasing from MLPs, giving a tax bill to the MLP investors in the process.  Please see https://sl-advisors.com/tax-story-behind-kinder-morgans-consolidating-transaction.

[JRM]

Lastly, the Price\Book ratio is not reflective of the replacement cost of the pipeline assets.  Many of these pipelines were put on the books 50+ years ago and are largely if not completely depreciated.

 

KMI actually increased its basis when purchasing from MLPs, giving a tax bill to the MLP investors in the process.  Please see https://sl-advisors.com/tax-story-behind-kinder-morgans-consolidating-transaction.

 

Thanks.  I didn't realize that.  They re-enforce the point in that article that pipelines can go up in value over time.  A point worth considering today.

[LearningMachine]

As expected, Clean Future Act to require "retail electricity suppliers to provide an increasing percentage of clean electricity each year starting in 2023, rising to 80% in 2030, and 100% in 2035. Clean energy is defined as 'economy wide, net-zero greenhouse gas emissions, or negative greenhouse gas emissions, after annual accounting for sources and sinks of anthropogenic greenhouse gas emissions consistent with the coverage of emissions reported by the United States under the United Nations Framework Convention on Climate Change.'"

 

Sources:

* https://www.natlawreview.com/article/clean-future-coming-are-you-ready

* https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/CFA%20Bill%20Text%202021.pdf

[JRM]

2035:

 

[LearningMachine]

2035:

 

 

Lol :-).

[KJP]

As expected, Clean Future Act to require "retail electricity suppliers to provide an increasing percentage of clean electricity each year starting in 2023, rising to 80% in 2030, and 100% in 2035. Clean energy is defined as 'economy wide, net-zero greenhouse gas emissions, or negative greenhouse gas emissions, after annual accounting for sources and sinks of anthropogenic greenhouse gas emissions consistent with the coverage of emissions reported by the United States under the United Nations Framework Convention on Climate Change.'"

 

Sources:

* https://www.natlawreview.com/article/clean-future-coming-are-you-ready

* https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/CFA%20Bill%20Text%202021.pdf

 

Is the existence of bills like these (and the sentiment behind them) bearish or bullish for pipelines (and oil and gas generally)?  I don't want to get into a debate about whether the Clean Future Act is a good idea/policy, but the chances of the current bill being enacted as is seem low at this time.  Nevertheless, the sentiment behind bills like it seems like a significant risk to new long-term investment in any portion of the industry (except for short-cycle wells).  Like any other industry, the enemy of returns here seems to be competition.  So, if new CapEx is deterred, what will happen to, for example, Williams and Kinder Morgan?

 

Somewhat relatedly, here's an analysis of the pathways to getting to almost zero carbon electricity by 2035:  https://www.2035report.com/downloads/

In a nutshell, the analysts project that the US would need to install an average of 70GW of new wind and solar per year from now until 2035, along with significant battery capacity.  The US appears to have been at about half of that rate in 2020, potentially boosted by the expiration (since extended another year) of the investment tax credit (https://www.eia.gov/todayinenergy/detail.php?id=46976)

 

Even the 2035 Report scenario has roughly 10% of electricity coming from gas in 2035. It did not examine the continued use of gas in other areas, e.g., industrial and residential.

 

 

[JRM]

If I get time I will put together a more thorough response.  My initial reaction is that natural gas isn't going anywhere anytime soon.  Coal is on the way out and so is oil.  The decline in oil will likely be slowly than people would like.

 

The problem with renewable energy sources, as most people already know, is grid reliability.  Its not just intermittent generation from solar\wind.  A power generator must also provide VAR support and frequency stability.  Then why not nuclear?  Nuclear plants (in the United States) do NOT load follow the grid and do not support grid stability in all aspects.  They provide reliable, base-load power but the not support frequency control on the grid, but they do contribute to VAR support typically.  Why not load follow?  The power plant operators don't like external factors affecting the conditions in the core.  By law, only a licensed operator is allowed to operate the primary system of a nuclear plant, so grid fluctuations are seen as an external control if load following.  In other countries, like France, they load follow so this is not a problem.

 

Also, I'm not an expert in mining of the materials needed, but I would have to think costs are going to go up with demand.  This seems like something that gets overlooked.  It would mean the transition is much more expensive than planed.

 

Long story short, natural gas is the best bridge to a renewable future.

[KJP]

If I get time I will put together a more thorough response.  My initial reaction is that natural gas isn't going anywhere anytime soon.  Coal is on the way out and so is oil.  The decline in oil will likely be slowly than people would like.

 

The problem with renewable energy sources, as most people already know, is grid reliability.  Its not just intermittent generation from solar\wind.  A power generator must also provide VAR support and frequency stability.  Then why not nuclear?  Nuclear plants (in the United States) do NOT load follow the grid and do not support grid stability in all aspects.  They provide reliable, base-load power but the not support frequency control on the grid, but they do contribute to VAR support typically.  Why not load follow?  The power plant operators don't like external factors affecting the conditions in the core.  By law, only a licensed operator is allowed to operate the primary system of a nuclear plant, so grid fluctuations are seen as an external control if load following.  In other countries, like France, they load follow so this is not a problem.

 

Also, I'm not an expert in mining of the materials needed, but I would have to think costs are going to go up with demand.  This seems like something that gets overlooked.  It would mean the transition is much more expensive than planed.

 

Long story short, natural gas is the best bridge to a renewable future.

 

I tend to agree with you based on another, less technical, reason:  Getting to very high percentage of renewables appears to require getting over or around large amounts of localized opposition to individual projects, e.g., large interstate electricity transmission lines, offshore wind projects, etc.  The current US political, regulatory and judicial systems allow for many veto points and time-loss through litigation.  I don't see most analyses taking these things into account.  Moreover, we're still building natural gas power plants and transmission pipelines, e.g., https://www.eia.gov/todayinenergy/detail.php?id=47156

 

On the other hand, the US federal government does have the power -- through legislative and executive action -- to eliminate or preempt many of those barriers, though it can be very difficult politically to use that power.  But if the federal government got serious about using that power, then I think a lot could get done relatively quickly, regardless of whether doing those things is or is not a good idea.

 

Regarding your point about grid reliability, the analysts in the 2035 report claim to show that their proposed grid would be reliable based various metrics.  In their proposal, reliability is addressed via large-scale battery deployment and natural gas peakers (they only get to a 90% clear by 2035, not 100%).  I lack the technical expertise to examine whether their models are plausible.

[JRM]

If you were to design the grid from scratch today, with today's technology, you would build renewable with load following combined cycle natural gas and maybe some battery backup.  The batteries are expensive and not the most effective in supporting the grid.  Additional capacitor banks installed at substations would provide VAR support. 

 

If everybody had a solar panel on their house or a NG fuel cell, then that would be a different story. People in California have a hard time understanding why we need NG, but it is essential for a large percentage of the population.

 

In the market where I work we are turning away large industrial users asking for a new gas service or asking for more gas.  There is industrial demand on top of power demand on top of residential demand.  I have a hard time seeing NG go to 0 anytime soon.

[KJP]

In the market where I work we are turning away large industrial users asking for a new gas service or asking for more gas. 

 

I don't want to pry too far into the details here, but is that because servicing them would require new investments in transmission infrastructure that the utilities don't think make long-term economic sense?  Or is it some other reason, e.g., it's inconsistent with a carbon reduction plan?