Shareowner Rebuttal to Kinder Morgan Statement in Opposition of Shareholder Resolution Requesting Report on Plans to Address Climate Change
Posted on Friday, December 9, 2016
March 1, 2016
Lead Filer: First Affirmative Financial Network, on behalf of Waterglass, LLC
Co-Filer: Zevin Asset Management
Contact: Holly A. Testa, Director, Shareowner Engagement
We urge shareholders to vote "FOR" the following shareholder resolution:
Shareholders request that KMI ("the Company") prepare a report analyzing the consistency of company capital expenditure strategies with policymakers' goals to limit climate change, including analysis of long- and short- term financial risks to the company associated with transporting high production-cost fossil fuels in low-demand scenarios, as well as analysis of options to mitigate related risk and harm to society. The report should be overseen by a committee of independent directors, omit proprietary information, and be prepared at reasonable cost by December 31, 2016.
The supporting statement specifically requests that the report include a discussion of:
- Consideration of a range of lower-demand scenarios accounting for more-rapid-than-expected policy and/or technology developments, including the "2 degree" scenario as outlined by the International Energy Agency (IEA).
- How the Company will manage risks under these scenarios, such as redeploying capital to lower carbon fuel servicing assets or returning capital to shareholders.
- The Board of Directors' role in overseeing climate risk reduction strategies and related capital allocation.
A similar resolution has been filed with the company for three consecutive years, with over 20% support each year. We do applaud the Company's decision to establish a Board level Environmental, Health and Safety Committee in 2015 as it provides a structure for addressing the Board of Directors role in overseeing climate risk reduction strategies. Nevertheless, the Company's approach to managing and disclosing climate change risks does not appear to have changed substantially. This is of increasing concern to many investors, particularly in light of the recent Paris Agreement at Conference of the Parties (COP) 21 that 196 countries signed. COP 21 set goals for taking action on climate change, aiming to keep temperature rise to well below 2 degrees C (3.6 degrees F) and to pursue enhanced efforts to limit temperature increase to 1.5 degrees C (2.7 degrees F).
Kinder Morgan discloses some climate change risks, but fails to disclose how those risks are evaluated and managed.
The Board indicates in their opposition statement that current reporting adequately discloses climate risk. While the Company acknowledges some climate related risks in their 2015 10-K, many of these disclosures are general in nature and do not address the specific concerns outlined in this proposal. Additionally, the Company's January 27, 2016 corporate overview presentation makes no mention of climate risk at all when summarizing key business risks.
Furthermore, the Board's opposition statement indicates that "... preparing a report analyzing the consistence of the Company capital expenditure strategies with policymakers' goals to limit climate change is not in the best interest of our stockholders at this time."
Long-term shareholders are likely to find the disclosure of this information very much in our best interests, as we need to determine if and how the company is managing and mitigating the financial risks associated with transporting high production cost fuels in a sustained and accelerating low demand (and low price) scenario. Our concerns have only been further enhanced by the recent Paris Agreement, the continued adverse environment for fossil fuels in general and ensuing credit woes, and the accelerating affordability and adoption of alternative energy sources. The substantial majority of the Company's customers are likely to be adversely affected by reduced reliance on all fossil fuels, presenting the Company with an increasingly challenging business environment going forward.
Over half of the Company's earnings are generated from transportation processing and storage of natural gas. While natural gas will certainly be in the energy mix for years to come and the Company will no doubt continue to benefit from continued development of this business segment, the Board's stated assumption that this resource is "clean and abundant energy source," when compared to coal, is increasingly an open question due to uncertainty about levels of fugitive methane emissions from the well head to delivery. 
Recent research also indicates that switching US electricity generation from coal- to natural gas-fired power stations may not, in fact, significantly lower greenhouse gas emissions, even assuming zero methane leakage and despite gas plants' lower emissions per unit of electricity generated. Instead, this coal to natural gas shift risks delaying the deployment and cost-competitiveness of renewable electricity technologies for making electricity, calling into question its reputation as the ideal "bridge fuel." 
Should it be determined that the differential between natural gas and coal is less than is currently assumed in terms of climate impact, there is significant risk to the Company given the importance of natural gas consumption to the company's business model. The projected growth anticipated by the Company in natural gas consumption to offset declines in coal use may not materialize, particularly as non-fossil fuel sources become more affordable and as storage issues are addressed.
A cornerstone of planned capital expenditures is the Trans Mountain Expansion Project, designed to increase the nominal capacity of the system from 300,000 bpd to 890,000 bpd for transporting Canadian oil sands to world markets via British Columbia and the Pacific Northwest. As another high carbon fuel it, like coal, is more vulnerable to regulatory action to limit climate change. Alberta recently announced new rules that cap industry carbon emissions and impose a carbon tax.
Production costs also makes the proposed expansion particularly vulnerable to scenarios involving reduced demand and/or lower prices; capital expenditure decisions should be considered within the context of this risk. According to the IEA's 2016 Medium-Term Oil Market Report:
"Heightened environmental concerns, a lack of pipeline access to new markets and the unknown impact of the victory by the New Democratic Party in Alberta's elections last year are causing companies to slow development"
"As such, we are likely to see continued capacity increases (in) the near term, with growth slowing considerably, if not coming to a complete standstill, after the projects under construction are completed."
A sustained decline in oil prices threatens the future profitability of oil sands production and the development of higher cost projects, constraining the future need for the substantial increase in capacity that this expansion represents.
The Board does indicate that customers have already contracted for 708,000 of the 890,000 barrel per day capacity. However, there continues to be strong, organized community and governmental opposition to this project that is likely to significantly delay the project, increase costs, present reputational risks, and may prevent the expansion altogether. As recently as February 2016, the City of Vancouver called on the National Energy Board to reject the pipeline expansion.
The statement in opposition indicates that the Company does not expect to allocate capital to coal related expansion projects, but that "coal continues to play a vital role in providing jobs and economically disadvantaged communities in the U.S. in providing affordable sources of energy for Americans and people around the world."
Coal is being challenged on many fronts by a host of cleaner, increasingly affordable sources of energy. Low natural gas prices will continue to challenge the possibility of a rebound in coal prices. Solar power's rapid progress towards price parity further erodes coal's place as the most affordable source of energy. Coal exports continued to fall, with the Energy Information Administration (EIA) estimating that U.S. coal exports decreased 23% in 2015, and projected to fall 11% in 2016 and 3% in 2017.
A central risk to expanding and maintaining the Company's capital intensive, long-lived, fossil fuel transportation businesses is the possibility of stranded assets and/or reduced profits resulting from a wide variety of efforts to reduce greenhouse gas emissions. The fossil fuel industry in particular, including the Company, must adequately prepare for the "2 degree" scenario and share their analysis of the risks with shareholders. Actions to reduce both the present and future impacts of climate change pose a serious threat to the vast majority of the Company's customers-and to the Company's businesses that rely on those customers.
We urge shareholders to vote in favor of this proposal.
NOTE: This is not a solicitation of authority to vote your proxy. Please DO NOT send us your proxy card; the proponent is not able to vote your proxies, nor does this communication contemplate such an event. The proponent urges shareholders to vote FOR this resolution following the instructions provided on the management's proxy mailing.
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