How Does Kinder Morgan Adapt to Shifting Energy Markets?

Steve Kean, the President and COO of Kinder Morgan, joins the Motley Fool's Taylor Muckerman to discuss the energy industry and the company's contribution to it as the largest midstream energy company in North America. The Kinder Morgan family includes Kinder Morgan,  (NYSE: KMI  ) , Kinder Morgan Energy Partners, L.P.  (UNKNOWN: KMP.DL  ) , Kinder Morgan Management, LLC  (UNKNOWN: KMR.DL  ) , and El Paso Pipeline Partners  (UNKNOWN: EPB.DL  ) .

In this video segment Mr. Kean discusses how Kinder Morgan adapts to changes in the energy industry -- such as reduced domestic use of coal in favor of exportation -- and whether the company has any plans to get involved as countries like China and Argentina consider exploiting their shale resources. The full version of the interview can be seen here.

A full transcript follows the video.

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Taylor Muckerman: One of the sides of business I find that investors don't necessarily know that you're involved in is coal exportation with Peabody Energy  (NASDAQOTH: BTUUQ  )  and a few other big miners down in the Houston area. You export that, and you're doing some expansion there.

I was wondering the future you see, because domestic use of coal has really taken a hit but they're talking about exports continually growing for 10-15 more years, so I was wondering if that's a core business or if that's going to be just mainly a cash generator for the long term?

Steve Kean: It's an interesting example about how one sector that we're in can affect another sector. The growth in natural gas production and the increasing use of natural gas because it's clean, abundant, environmentally sound, and cheap, has displaced some of what coal was serving in the electric generation market previously, so those coal producers are looking for other outlets.

The expansions you're referring to are primarily to give those coal producers a way to reach the international market, which is growing. The gas sector, which we operate in, is driving coal out of the U.S. market to some extent.

Muckerman: Unfortunately for them, yup.

Kean: The way we participate in that, and the way they adapt, is that they underwrite expansions at our facilities to increase the exports, so it's a good opportunity for us. It is a fee for service business for us. They rent the space, if you will, hold the capacity, and then they pay us fees for what we actually handle or move.

Muckerman: OK, so it's not a take-or-pay. They actually pay on a quantity basis then?

Kean: No, it is a take-or-pay; take-or-pay in the sense of, they are paying to reserve the space -- the ability to store a certain number of millions of tons of space -- and then they pay volumetric charges to actually handle it; the offloading of it, and then the onloading of it to outbound ships, for example.

Muckerman: Very interesting.

Sticking with growth opportunities, China -- one of the big buyers of coal -- has obviously got vast shale resources and severely lacking in infrastructure, much like the United States was 10-15 years ago.

Would that be a move that Kinder Morgan might make, either on the build-out side, or maybe just the outsourcing of your general know-how to countries like China or Argentina, that really are going to be needing pipeline infrastructure?

Kean: We are very much focused on the MLP structure, which is a U.S. phenomenon. It is a U.S. structure.

We would never say never to international, but right now for us "international" is Canada and Mexico. There are a lot of difficulties in running an intercontinental business, let's call it; all kinds of complications. What we would have to be convinced of is that the returns were going to be so superior for us taking on that additional risk and that additional complication, for us to make that leap.

Frankly, so long as we find ourselves in the position that we are right now -- which is that we've got a lot to do right here in North America, in markets that we understand, on a continent that we understand, in business sectors that we understand -- we don't feel a lot of pressure to go looking to establish a position in China or in Europe or Africa or anywhere else.

Again, never say never, but we would really have to be confident that we were going to be adequately compensated, to take on that additional risk and that additional complication in our business.

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