The Energy Infrastructure Newsletter • Winter 2020
As an investment advisor, you have been subscribed to the Energy Infrastructure Newsletter so that you and your clients can stay abreast of this powerful emerging subsector. Formerly the MLP Newsletter, the Energy Infrastructure Newsletter is published in partnership with the Energy Infrastructure Council, a nonprofit trade association dedicated to advancing the interests of companies that develop and operate energy infrastructure. EIC addresses core public policy issues critical to investment in America’s energy infrastructure.
Advisor Access talks with Lori Ziebart, President and CEO of the Energy Infrastructure Council, about how the energy midstream is responding to transitions on the political front as well as to changes resulting from the increasing emphasis on moving toward renewables.
Looking Forward: EIC Sees Positives for the Midstream in a Changing Landscape
Advisor Access: With the Biden Administration set to take office, energy and climate change are clearly on the agenda. How will EIC navigate these challenges? What can we expect from you and your members in 2021?
Lori Ziebart: It is clear that an energy transition is underway. The eye-popping market capitalization ascribed to electric vehicle companies and expansion of wind and solar power in resource-rich Texas alone demonstrate the rapidly evolving energy landscape. But contrary to those in the activist community who think wholesale change will occur overnight, it’s clear this evolution will be measured in decades, not weeks, months, or years, and will not be limited to any single energy source.
Throughout this evolution, traditional resources will serve to underpin our economy with low-cost, abundant energy, and you will continue to see midstream companies adopt new technologies, enhance operational efficiencies, and team with new energy sources to lower emissions—all while providing energy security and stability for the country. Midstream has a great story to tell, and we are going to make sure people hear it loud and clear.
That said, we expect the Biden Administration will attempt to move the energy transition forward more rapidly. We already can see this in the commitments to rejoin the Paris Agreement, promises of expanded international engagement, the appointment of John Kerry to a new cabinet level post of Special Presidential Envoy for Climate, and the naming of White House staff and transition personnel with strong climate and renewable/alternative energy credentials. As the new administration begins to fill other government positions, we anticipate sophisticated interagency cooperation between a variety of departments and offices not traditionally known for their energy profiles. This focus will continue regardless of who controls the Senate, albeit legislative initiatives may be tempered if Republicans remain in the majority.
In response to this shift, EIC will redouble outreach to bipartisan supporters in Congress and actively educate new administration officials on our role in the energy value chain. We will emphasize the important contributions the midstream sector is making in the evolving energy transition, and explain the critical role we play in the overall economy.
Our members are infrastructure, and they move the energy that fuels the world. My job is to highlight these companies, which traditionally have stayed in the background, and introduce them to a new generation of lawmakers and staff as part of the solution to climate change, global energy needs, equitable access to sustainable development, and eradication of energy poverty—not part of the problem. In fact, our members have been contributing toward the Paris Agreement objectives for years.
Products derived from oil and natural gas don’t just serve as cost-efficient portable fuels. They are essential components of modern society, and integral to daily life. Shale-driven energy abundance, coupled with responsible management of our natural resources through stringent environmental regulation, has allowed us to export North American liquified natural gas (LNG) and liquified petroleum gasses (LPGs) to the developing world in quantities never before imagined. These resources help nations combat energy poverty by providing their citizens with cleaner and healthier alternatives to traditional, high-carbon fuels like charcoal, animal waste, and wood (biomass). Today, nearly 40% of the global population, which is now nearly 8 billon people, lack access to clean cooking. U.S. LPGs benefit the most vulnerable in energy poverty and enable developing nations to move to cleaner fuels, which improves quality of life, reduces in-home pollution mortality, empowers women and intergenerational equity, lowers emissions, and reduces deforestation.
The global population is growing by approximately one billion people every twelve years. To meet the increase in demand for power and fuel, which people want and deserve, the world needs our resources and expertise. Renewable and alternative energy development is part of the solution, but traditional energy, such as LNG and LPGs, is more important than ever if we are going to reduce emissions in the near term and improve the lives of the forgotten three billion people who live in energy poverty.
AA: What is EIC doing to support its member companies in the energy transition?
LZ: EIC member companies recognize the evolving landscape, and many already embrace new technologies, increasing efficiencies, incorporating renewable/alternative energy into their operations, and focusing on environmental, social, and governance (ESG) disclosure and reporting. Since we cannot manage individual company operations, the one area where we decided EIC could help was ESG.
In late 2019 EIC established a board-level ESG Working Group cochaired by CEOs of leading companies in the midstream space—Alan Armstrong, President and CEO of The Williams Companies, Inc. and Bob Phillips, Chairman, President and CEO of Crestwood Equity Partners LP. The mission of the EIC ESG Working Group is to provide guidance on best practices and resources to assist member companies in their ESG journeys. The working group also was tasked with developing two deliverables: an ESG Toolkit and a reporting template to serve as the primary ESG reporting tool for midstream companies.
In late November, we released the EIC ESG Toolkit, and earlier this month, after significant work, compromise, and collaboration with EIC member companies, GPA Midstream, and investors, we published the first-ever EIC/GPA Midstream ESG Reporting Template (www.eic.energy/esg). We are confident these products will accelerate the sector’s adoption of ESG best practices, as well as ensure consistent disclosure and reporting of accurate and quantifiable metrics that are meaningful for investors, ESG rating agencies, policymakers, and the public.
As the ESG landscape and midstream companies’ ESG journeys evolve, we will continue to update the toolkit and template to ensure their relevance. This year-long initiative puts us in a proactive stance as a new administration takes office, and positions us well for positive dialogue, not only about the important role midstream companies play in the energy value chain, but also their contributions to positively addressing climate change.
AA: It has been a rough year for energy investors. What are your thoughts as we look ahead to 2021?
LZ: Irrespective of stock and unit prices, energy infrastructure companies are financially healthier than ever. Following the industry-wide downturn experienced several years ago, the sector increased focus on improving the financial positions of companies. This included actions to reduce leverage via debt repurchases, free cash flow growth, and more focused capital spending.
Companies have worked diligently to drive down costs on a sustainable basis by being more efficient and incorporating new technologies. In fact, a recent UBS research report stated its covered energy infrastructure companies are expected to reduce operating expenses and selling, general and administrative (SG&A) expenses by 5% in 2020, as compared to 2019, with a further 5% reduction expected in 2021.
Some industry experts also believe consolidation will play a key role in further strengthening the industry. We have begun to see this dynamic play out in the exploration and production side of the energy industry, and certain transactions within the energy infrastructure space could further strengthen companies and their value to both customers and investors.
At the same time, the value proposition of capital return and attractive current yield is unchanged, as many energy infrastructure companies remain committed to cash distributions, and more recently, a growing number of equity buybacks. The value of this capital return is amplified by a continued environment of historically low interest rates.
AA: How has the COVID-19 pandemic impacted energy infrastructure?
LZ: Tragically, every industry, company, and community around the world has been impacted by COVID, and energy infrastructure companies are no exception. Importantly, however, when compared to other sectors that were unable to sustain operations during the pandemic, energy infrastructure companies and their employees continued to safely and successfully manage facilities, and operate vast and interconnected pipeline transmission networks to ensure safe and reliable energy reached consumers. It is noteworthy that energy industry workers are deemed “essential” by federal guidelines and/or state essential worker orders.
We all can take for granted the things that make life comfortable and safe, but during this crisis, I think more Americans realized how important essential ingredients to life, like propane, natural gas, gasoline, and reliable electricity, were as they sheltered in place. Beyond providing energy, ingredients from petroleum also were critical to manufacturing personal protective equipment (PPE) for first responders and hand sanitizer for the entire country. It has been a reminder that products derived from oil, natural gas, and natural gas liquids are the foundation of modern antiseptic medicine. We owe so much gratitude to the hundreds of thousands of employees across the industry who continue to dedicate themselves to helping companies operate safely and reliably every single day, without fanfare.
AA: Thank you, Lori.
The EIC is managed by President and CEO Lori E. L. Ziebart. Ms. Ziebart, in consultation with the EIC Board, leads and manages EIC’s operations and outreach activities with policymakers, the investment community, and the public to communicate the significant value energy infrastructure companies and master limited partnerships (MLPs) contribute to the U.S. economy. Ms. Ziebart spent several years on Capitol Hill in positions of increasing responsibility, including tax counsel to the U.S. Senate Finance Committee. Ms. Ziebart also previously worked for KPMG and Vinson & Elkins, and served as Vice President of Government Affairs for El Paso Corp. and Goldman Sachs before establishing her own consulting business. Before becoming president and CEO of EIC, she was the executive director of MLPA, and prior to that was engaged by MLPA to support its legislative and regulatory outreach activities. Ms. Ziebart is a graduate of Mount Holyoke College and Georgetown University Law Center.