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Kinder Morgan Coal Report 2014

Kinder Morgan, Inc. is the largest midstream and the third largest energy company in North America and has extensive and expanding interests in coal transport. 
In recognition of the need to combat climate change and minimize global temperature rise, most nations agreed in 2010 that “deep cuts in greenhouse gas emissions are required” and “the increase in global temperature should be below 2 degrees Celsius.” 
According to the International Energy Agency (IEA), total proven reserves of coal, oil, and natural gas represent approximately 2,860 gigatons in potential CO2 emissions; the IEA states that “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2° C goal, unless carbon capture and storage (CCS) technology is widely deployed” and, “almost two-thirds of these carbon reserves are related to coal.” 
Goldman Sachs states “most thermal coal growth projects will struggle to earn a positive return for their owners.” It finds that “even when carbon prices are low or non-existent, the downside risks of future regulation can offset the cost advantage of thermal coal relative to alternative energy sources.” 
HSBC indicates that declining coal demand after 2020, due in part to efforts to address climate change, could reduce the current discounted cashflow valuation of coal producers by 44%. 
The World Bank and European Investment Bank have recently placed restrictions on the financing of coal projects.
Even without a legally binding global agreement to reduce greenhouse gas (GHG) emissions, the coal industry worldwide is currently facing rapidly increasing competition from lower carbon energy sources including renewable energy and natural gas.  
Kinder Morgan invested approximately $450 million in coal terminal expansion in the past year and projects additional significant capital commitments to its coal terminal facilities in the future.  Investors are concerned that actions taken to significantly reduce global GHG emissions could cause a portion of the company’s coal-related infrastructure to lose significant value prior to the termination of its expected useful life.  
Shareowners request Kinder Morgan prepare a report by October 2014, omitting proprietary information and prepared at reasonable cost, on the company’s goals and plans to address global concerns regarding fossil fuels and their contribution to climate change, including analysis of long and short term financial and operational risks to the company.
We recommend the report include discussion of:
  • Risks and opportunities of lower carbon scenarios in which global coal demand declines significantly due to evolving policy, technology, or consumer responses to address climate change;
  • Whether and how the company’s capital allocation plans account for the risks and opportunities inherent in these scenarios;
  • Plans to manage these risks, such as avoiding major new investments related to high-carbon energy sources and / or returning more capital to shareholders;
  • Assumptions regarding deployment of CCS;
  • The Board of Directors’ role in overseeing capital allocation and climate risk reduction strategies.