Capital discipline remained a key theme as Kinder Morgan Inc. executives on Wednesday shed light on fourth quarter 2019 earnings and the outlook for 2020. The midstreamer recorded another quarter of increased natural gas volumes, but the weak price environment has taken a toll on recontracting efforts for some assets.

The Kinder (NYSE: KMI) natural gas pipelines segment saw volumes increase 14% in 4Q2019 compared with 4Q2018, the eighth quarter in a row in which volumes climbed year/year by 10% or more.

The largest gains were on El Paso Natural Gas, up nearly 1.3 Bcf/d year/year from ongoing Permian Basin activity and cold weather in downstream California markets. Tennessee Gas Pipeline volumes rose more than 1 Bcf/d, while Colorado Interstate Gas was up 780 MMcf/d from increased Denver-Julesburg production and higher heating demand in the Front Range of Colorado.

Kinder Morgan Louisiana Pipeline, Gulf Coast Express (GCX) and the Texas intrastate pipelines also contributed to the volume increase.

Given the bargain-basement gas price environment, CEO Steven Kean said the company continues to have conversations with customers as they navigate the downturn. “The dry gas producers are under some strain, and they're being very careful and thoughtful about how they are managing their business.”

Ruby Pipeline, which took a hit during the quarter as contracts expirations approached, is a “challenged asset” given that the Rockies region is “overpiped,” and there are alternative sources from Canada to serve markets in the Northwest, according to Kean. The Midcontinent Express pipeline is challenged as well, but the company is seeing “nice positive spreads that we’re able to transact at.” There's a “multi-zonal system” that “gives us access to a lot more supply and delivery, interconnects and takeaways.”

In discussing the status of the Permian Highway Pipeline (PHP) project, which would move Permian gas volumes to the Texas coast, Kean said cash basis prices at the Waha hub almost immediately widened following GCX’s in-service in September. Fixed prices were back in negative territory by December, the first time since August.

The dramatic price action shows “once again the need for additional pipe,” Kean said. “Just to put things in perspective, the spread is about two to three times the value of the tariff.”

Kinder has acquired 99%-plus of the rights of way for PHP, which is “a significant milestone given that we were going through the Texas Hill Country,” Kean said.

Last week, the Barton Springs Edwards Aquifer Conservation District voted to join a Hays County lawsuit against Kinder, the U.S. Fish & Wildlife Service and the U.S. Army Corps of Engineers that alleges violations of the Endangered Species Act. The district’s board of directors said “because there is not a reasonable assurance that the aquifers will be protected during the construction and operation of the pipeline, the Permian Highway Pipeline should not be located within the district or any other hydrologically-sensitive area.” Kinder settled another lawsuit with the city of Kyle, TX, in October.

“We are well along in the construction of the western spread” of PHP, and “we believe that we are close to getting our federal permit so that we can begin construction on the eastern spreads,” said Kean. “That process has taken longer than we planned,” but the midstreamer continues to expect an early 2021 in-service date for the fully subscribed 2 Bcf/d project.

Another Permian takeaway project, to be called Permian Pass if it were to be sanctioned, remains “a work in progress” but is not included in the company’s $3.6 billion backlog. The pipeline will be needed eventually, but “it’s probably not as soon as we thought this time last year.”

Kean said commercial discussions around Permian Pass cooled a bit after producers last year issued 2Q2019 guidance and “tightened up on their capital plans.” However, talks continue.

“We’re continuing to talk with producers and potential partners and believe No. 1, the long-term dynamics of needed gas takeaway capacity out of the Permian Basin are strong and that our extensive pipeline network in Texas put us in a good position to pick up this opportunity when the market is ready to sign up for it.”

Meanwhile, construction continues on the intrastate Dayton Loop Project, which would provide incremental takeaway capacity from East Texas and Goodrich in Polk County to the Houston Ship Channel, Texas City and Katy market areas. The project is on schedule for service by the end of March.

Kinder expects the Sierrita Gas Pipeline expansion to be online in the second quarter, as construction on the $56 million project is nearly complete. The expansion of the Natural Gas Pipeline Co. of America system is expected to get underway in the coming months. Federal regulators gave the $52 million project the green light to begin construction on Wednesday.

Natural gas gathering volumes in 4Q2019 were up 8% year/year, primarily from higher volumes on the South Texas, Eagle Ford Shale and Bakken Shale midstream systems.

Natural gas liquids transport volumes were up 23% year/year because of higher Cochin Pipeline volumes. Kinder sold the U.S. segment of the cross-border Cochin to Pembina Pipeline Corp. for C$4.35 billion ($3.3 billion) last August, a transaction expected to close this quarter. Kinder sold the stock earlier this month.

Crude and condensate pipeline volumes and total refined product volumes were flat compared with the fourth quarter 2018.

Kinder also continues the commissioning and startup of the Elba Liquefaction Project near Savannah, GA. Three production units were placed in service in 2019, with the first cargo setting sail in December and a fourth unit entering service earlier this month. The remaining six trains are scheduled to be placed in service by the end of June.

For 2020 and beyond, management remains focused on capital discipline and only plans to invest in projects that meet its “high hurdle rates,” Kean said. In referencing the roughly $500 million decline in backlog from 3Q2019, the company chief said it does not approach capital investments with the idea of “replenishing a backlog.” It continues to guide between $2-3 billion annually for investments that generate attractive returns.

Executive Chairman Richard Kinder said as the energy segment’s share of the U.S. economy has declined to about 4% from its high point of around 16% in 2008, Kinder has to “produce positive cash flow from operations and use it to benefit our shareholders.”

The industry also must push its message that fossil fuels, and particularly natural gas, “have a long runway of future utilization under even the most bullish scenarios for converting the world’s economy to renewable fuels.” The industry has to “to do as much as we reasonably can to reduce our emissions, becoming part of the solution, not part of the problem.”

Kinder has aimed to be a leader in environmental, social and governance (ESG) initiatives and last year formed a multi-disciplinary working group with employees from each of its business segments and several shared service departments, according to Kean.

“This is something that is permeated through our operations...That job’s not done.”

For example, management continues to monitor methane emissions reductions, achieving reductions across the chain, from production through distribution, beyond the 1% limit imposed by Our Nation’s Energy Future Coalition. The industry group focuses on collectively achieving a science-based average rate of methane emissions across facilities equivalent to 1% or less of total natural gas production.

Kean noted that the transmission and storage sector’s allocation of that 1% limit is 0.31%, and Kinder is at 0.02%.

“We’ve really done a very good job there, and that’s good operational blocking and tackling. That’s in our shareholders best interest too, because we get paid to move methane, not to lose it.”

The company chief said ESG would remain an integral part of its business, but it would not carry out an uneconomic divestiture or target a dilutive renewable acquisition in doing so. “We’re keeping an eye on the G as well as the E and S.”

Richard Kinder said the strategy is, in many ways, a conservative one. “Energy infrastructure companies like Kinder Morgan generate lots of cash flow, and the test of good management is how that cash flow is utilized.”

Since the collapse of oil prices in 2014 and 2015 and its “decidedly negative impact” on the equity value of the energy segment, management has prioritized getting its “balance sheet in shape, returning dollars to our shareholders through dividends, buying back shares on an opportunistic basis and pursuing expansion projects when they promised a high and secure” internal rate of return. “We believe that approach has been the correct one, and we will continue to follow it in the future.”

Kinder reported fourth quarter net income of $610 million (27 cents/share), up from $483 million in 4Q2018 (21 cents). Distributable cash flow (DCF) was $1.35 billion (59 cents/share), up 6% from $1.27 billion in 4Q2018.

For the full year, net income was $2.19 billion, up from $1.481 billion year/year. DCF was $4.993 billion for the year, up 6% from $4.73 billion in 2018.

Kinder will host an investor day next Wednesday (Jan. 29) in which it will provide a more detailed outline of 2020 plans.

Want to see more earnings? See the full list of NGI's 4Q2019 earnings season coverage.