Kinder Morgan, Inc. (KMI) Earnings Call Transcript & Summary

Great. And aside from LNG feed gas, which is the primary driver of near-term growth, of course. To your earlier point, Kim, power generation is another major contributor to the positive outlook for gas infrastructure, in part, supported by the anticipated proliferation of data centers to come. So now that the proposed copper state connector is unlikely to move forward following the sanctioning of a competing project, could you provide color on other major project opportunities that Kinder is currently assessing to support the growing gas to power load? And where are KMI's competitive advantages in winning these potential projects?

Yes. I mean I think I'll just start with the competitive advantage. I mean we've got a huge natural gas system. So if you look at the design capacity of our interstate natural gas projects, I mean, interstate natural gas pipelines, it's like 63 Bcf a day. I mean, so we've got a huge system that we can then build off of. And so that makes expansion opportunities very economic generally. And allows us to offer our shippers a lot of different services in order to meet their needs. So that's where we get a lot of competitive advantage. I mean I think other places is we're in this business for the long haul. So when we build pipeline projects, we want to make sure that they are going to work for the long haul and serve our customer needs. And I think generally reviewed as a very good operator. So I think all those things work together to help us win those projects. But in terms of the opportunity set that we see today. And this is overall, not just on power, but I'd say a big portion of this is related to power. Back in the first quarter of 2024, we said that we had an opportunity set. So projects that we were looking at that were not in the backlog at that time of $7 billion to $11 billion, right? And since that time, our backlog has grown from $3 billion to $9.3 billion. We've actually added like $8.5 billion of projects, put $2.2 billion in service. That's how you get to that out of $6.3 billion that we've added to our backlog. And then obviously, we weren't successful on Copper state. So we went back and we said, "All right, what does the opportunity set look like now?" And so when we went across the businesses and looked at the opportunity set, the opportunity set is still in that $7 billion to $11 billion range even though we have added all these projects. So I think as we -- as you noted at the start, the demand for natural gas has continued to increase and gotten better and the opportunity set has not diminished. So I think we've got lots of opportunity in power. Right now, our $9.3 billion backlog, about 50% of that is associated with power. And I think the one thing people miss, everybody is so excited about AI and data center demand, and there's definitely going to be a lot of that. But there are so many other power opportunities out there. Our South System 4 expansion that we did -- some of that may be data center, but a lot of it is not data center. A lot of it is just growth in power demand as a result of the factors that I talked about earlier. We are -- we've got power expansions, coal conversions for [ TVA ] that we're working on. You've got new power plants being built in Arkansas. You've got new power plants being built up north that we pursue -- that we've got projects on NGPL. And then I think you'll see some other power plant conversions in Arizona that probably can't be served with the Transwestern expansion. So I think there's enormous opportunity on the power side. But our opportunity set, despite the fact that we've added all these projects is not diminished.

Fascinating. With the steadily increasing demand for transmission infrastructure across the U.S., to your point, do you expect returns to trend higher from here? I mean even just looking at that $9.3 billion sanctioned backlog, can you tell us about the economics that you've observed have evolved? And from a regional perspective, where do you think the most attractive returns are?

Okay. So here's what I'd say on that. Almost every project that we do is competitive. And so we are always almost -- unless you're building like a 5-mile lateral off an existing pipe, you are almost always in a competitive environment and especially on greenfield projects. And so I don't anticipate that returns are going to move up from here. But I would also say that the returns that we get are very attractive. As you know, the $9.3 billion that we have in our backlog is coming at less than a 6x multiple when you look at first year EBITDA. So I mean, very, very attractive projects. So I think we are happy with those returns and happy to do all the projects that we can get at those types of returns. And given the amount of prospects out there, I think we will continue to be able to do projects at those returns, but I don't see returns increasing. When you think about where we get our -- the better returns, I'd say the greenfield projects are very competitive. I'd say, on some of the brownfield projects, that's probably where we get a little bit higher returns. And then we also target higher returns on like a gathering and processing opportunity. So it's always about balancing the risk and reward making sure that if we're taking more risk, we're getting more return. But at the end of the day, what we're trying to do with our backlog of projects is deliver high-quality growth to our investors. And the goal is we try to keep our base business relatively flat and then deliver nice growth from these expansion projects, which we are funding with internally generated cash flow. So there's not incremental interest or dividend costs associated with financing these projects.

Got it. We spend over half the time on natural gas. Turning to maybe the less sexy part of the business but equally important in cash yielding. On the liquids side of things. So tell us about how these assets fit within your portfolio? And also from the lens of commodity exposure, obviously, on the natural gas side, very minimal commodity exposure, if any. On the liquid side, there is a little bit more sensitivity to crude price, which this year has beared some volatility. How do you see that evolving going forward? And would just left to get your thoughts here?

Okay. So that's good. Your first point is how do they fit within our portfolio and your second question is about commodity exposure. So in terms of how they fit within the portfolio, so if you look at how Kinder Morgan assets break down, 65% of our portfolio is in natural gas, about 26% of our portfolio is in refined products, about 9% of our business is in CO2/energy transition. So we are very comfortable with that portfolio of assets over the time that I've spent in the business. At different times, different sets of assets have had the biggest growth opportunities. And right now, that opportunity set is in natural gas. And one thing that's great is it happens to be the biggest asset, the biggest asset type in our portfolio. So that works out well for us. In terms of the other businesses, the refined products businesses are very stable assets. We get inflation adjustor, a price adjustment on those annually through on the pipeline, through the pipeline tariff. And if you look at our contracts on the terminal side, generally, those contracts have escalators built into them. So you have some nice inherent growth built into them. They're relatively low in terms of capital intensity, so they deliver a lot of cash flow to our business that we can use to finance the growth in natural gas. And on the CO2 assets, we get great returns. We target good returns. So there where you have a little commodity exposure, we're targeting to get 20%-plus returns on that business. We look at those returns on all the projects that we're doing with our Board every quarter. And most of those projects are exceeding 30%. So we're getting very attractive returns where we are taking commodity risk. We think that is -- that's compensating us for the additional risk that we're taking. So very comfortable with that portfolio of assets. That being said, we are economic creatures. And so every business that we have is for sale every day. And if we get the right price for an asset, we will sell it. We will make the right economic decision. But there are tax consequences to selling assets, and so we have to overcome those tax consequences for it to be the right economic transaction for us. And you say, well, how does that happen? I mean there are places where we found that assets that we've had in the past were better owned by someone else, where they had more synergies or could get more out of the assets because of other assets that they own. And so we've sold assets in the past, not averse to doing it, just need to make sure that we get the right economic results from that. And then on commodity price exposure, you looked the way our business breaks down, about 64% of our EBITDA is from take-or-pay contracts, meaning that our customers pay whether or not they use the capacity. Now in the long term, we want them to use that capacity because that means they'll renew their contracts when they roll in 10 years. But in the short term, if there are fluctuations in demand, it just -- it's not a big deal for us. 26% of our business is fee-based, meaning that there's no variation in the price we receive. There's some fluctuation in volume. But a lot of that volume on that is associated with refined products, which is pretty stable. And then 10% of our business is exposed to commodity price. Most of that's in CO2, so it's exposed to oil price. And then some of that is in our natural gas gathering and processing business. On the CO2 side, we hedge a good portion of that in any current year. So when you look in the current year, we only have really 5% of our business is exposed to commodity prices because we hedged the other 5%. So I think given the nature of the cash flow on the rest of our business, the scale and the scope of the business, the balance sheet flexibility we maintain, I would put this set of assets up against most others. I mean, it's a really nice set of assets that we own, a really stable business. The one thing I'd say about volatility is it also presents opportunity for us. So the services that we provide and especially natural gas volatility because of the services that we provide our natural gas customers. And so when you get big volatility in gas prices because you're getting change in supply or demand, we can provide storage services for our customers. So we can provide what we call synthetic storage, which is parking loan on our pipes. And so there's -- we can provide balancing services. So there's a whole host of incremental services and ancillary services that when you see volatility in supply or demand, we provide for our customers and bring us incremental revenue.

Thank you for that comprehensive answer. I do want to touch on the CO2 segment and how you see the future for the segment evolving. So on one hand, the recently passed OBBA includes tax incentives to support EOR activities. However, elsewhere in the segment, the RNG business have faced intermittent operational challenges as the facilities have come online, plus headwinds due to lackluster D3 RIN prices. So how do you view the path forward for the CO2 segment?

So CO2, obviously, we talked about the oil & gas business, the returns that we get there. And we have -- there aren't a lot of players in the CO2 business. And so we've got a -- and we've got an expertise in a business that a lot of people don't understand. And so we're continuing to invest in CO2, where we can -- the CO2 oil and gas production, where we can get returns. And then we have optionality, if you will, on CCS or CCUS, so carbon capture. You noted that the reset OBBA took the tax credits that you can get on CCUS, so capturing carbon injecting it for EOR and then producing oil from $65 to $85. So it makes more of those projects economic. And so that will -- that presents additional opportunities for us. But it's nice that we've got the staff of engineer -- reservoir engineers they know how to keep CO2 in a certain area. So for example, we had a field onetime where we are injecting CO2 to produce the oil and the CO2 started migrating to someone else's field where we know how to install water curtains to keep it within that field. So now when somebody else wants to do it in their field or just sequester it permanently, we have the expertise to do that, not many people do. So we've got an existing business. We have those reservoir engineers on staff. We're keeping them busy on our CO2 business. But -- so we're not incurring a lot of overhead to have the optionality on the CCS and the CCUS business. So I think it's -- it's a great place to be. That business is going to take time to develop. I think it slowed down a little bit under the current administration. But I think there'll be opportunities in the future there. On the RNG business, it's something that's -- it's -- you noted that RINs prices have come down. That makes new investment opportunities less economic. So I don't see it as a business that will be expanding a lot in the next -- or during the current administration. But it's a fine business. We have had our operational challenges, but I think we're getting to a point that we're getting those facilities running much more smoothly. And so it will be a fine business for us to stay in, and then we can see what happens after this. But I think -- in general, this administration has been hugely positive to the natural gas business. And everything we're seeing there, which is 65%, a little bit of headwinds on the RNG business, which is less than 1% of our business. So we'll take that equation any day.

Fair enough. And finally, I'd like to discuss Kinder's capital allocation priorities from here. With this lengthy runway of potential gas infrastructure projects, would you consider increasing run rate CapEx above the $2.5 billion run rate over the next few years to support more growth opportunities. And how do you plan to balance growth in general versus maintaining comfortable leverage and returning cash to shareholders?

Okay. Let me say a couple of things about that. So for those of you who aren't as familiar, what we've guided is we have roughly $2.5 billion per year of expansion. CapEx opportunities, which we can fund based on what we pay out in the dividend and $2.5 billion we can fund with internally generated cash flow. And so it's -- $2.5 billion is a rough number in any given year, that can be up or down from that just depending on how the project spend rolls out on the $9.3 billion backlog. If it's more than that, we've got balance sheet flexibility. Right now, our leverage, our debt-to-EBITDA is 3.9x. Our balance sheet range that we try to maintain is 3.5 to 4.5x debt-to-EBITDA. So we're in the middle, slightly on the lower end of that range. So we've got flexibility there to take on more expansion. And if you look at the projects coming online that we're doing and what happens to leverage based on the $9.3 billion backlog, leverage trends down over time. And so what that's doing is that's just creating more balance sheet flexibility for us in the future to add projects. So we've already got some balance sheet flexibility to do incremental projects. We're adding more flexibility over time. Our view is for the projects that we're pursuing at the returns that we're getting, if we ever needed external capital to finance those, I mean, we could do that. And as opposed to missing an opportunity, you get -- you do a JV, you get 50%. I mean there's lots of ways to cut that. I don't think we're anywhere near having those conversations just because of the balance sheet capacity that we do have. And I expect that we'll continue to add to the $9.3 billion backlog given the demand in natural gas growth. On the dividend side, I think what you'll see us pursue is similar to what we've done over the last few years, we want to grow the dividend by some amount, but it keeps it fairly modest given the opportunity set that we see out there. So I think it's important for those people who are owning our stock for dividends to show some growth, but at the same time, we want to maintain flexibility given the current environment in which we find ourselves.

Excellent. Thank you so much, Kim.