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

All right. This is the session for Kinder Morgan. To my left, I've got Kim Dang, CEO; and Dax Sanders to her left, yes. So thank you all for being here. Appreciate it.

Yes, good to be here, Michael.

First of all, if you don't mind, could you just close the door in the back. Thank you. So put out the guidance last night. So I figured maybe just start with that, just talk through it, and then maybe I'll have a question or two on that.

Sure. So we put out a guidance, which shows a 4% growth in EBITDA from 2025 to 2026. It shows 8% growth in earnings. It shows us ending the year -- next year at 30.8x debt to EBITDA on the balance sheet well -- or at the lower end of our 3.5 to 4.5x range. And it shows $3.4 billion of expansion CapEx. The other thing we did was we raised our expansion CapEx guide. We used to talk about approximately $2.5 billion per year, and now we're talking about over $3 billion per year for the next few years, and that's just a function of the project opportunities that we've continued to add to the backlog as well as the timing of that spend. And so we think a fantastic opportunity in the midstream space right now, getting nice growth in EBITDA and earnings and lots of opportunities for economic investment.

Great. And I should have set up front, if anyone has questions, just raise your hand, we'll run a mic to you, and just -- at any time, just raise your hand and ask a question, just feel free to interrupt me. Yes. So I guess at a high level, like you said, it's a pretty exciting time in the industry and certainly for the company. It seems like you're in the right place at the right time. So you've had a really significant increase in the backlog for the last few years, almost all of that gas pipeline investments. I guess my first question is, and maybe you kind of answered it already is, what inning do you think we're in here? Like like how long do you see the runway for growth and projects and investment opportunities? And do you see any risk to that long term?

Sure. So I'll start with the existing backlog of projects. So these are projects that we have contracted and our Board approved. So that's $9.3 billion is our current backlog of approved expansion projects. That's up from, as you mentioned, substantially from two years ago. Two years ago, that number was $3 billion. So that $9.3 billion is going to generate nice growth in EBITDA for us. As you said, 90% of that is associated with natural gas, and it's coming at less than a 6x EBITDA multiple. All those projects, again, Board approved and contracted with customers. So that will lead to nice growth. But beyond that, we have a huge set of opportunities that we're working on. And when we go back and we look at that set of opportunities that we're working on that's sort of beyond the backlog, we went back, and we looked at it when the backlog was $3 billion. And then obviously, we know what it is now, and that opportunity set hasn't changed. It hasn't gotten any smaller from when the backlog was $3 billion. So we feel like we've got really nice continued opportunity in the natural gas space, that's being driven by the 20% plus growth in natural gas -- in the natural gas demand that we expect between the end of 2024 and 2030. And it's going to be between 22 and 28 Bcf a day, and 22 is WoodMac's number, which is a third party, 28 is Kinder Morgan's internal number. And that's primarily being driven by export LNG and power as well as a little bit of Rails Com and exports to Mexico. So just a fantastic time to be in this space, seeing lots of opportunities to expand our existing asset base and serve the market.

So maybe just to follow up on that. On the last call, you made a few interesting comments to frame that. You talked about evaluating more than 10 Bcf of natural gas projects tied to the power gen sector. And then you also talked about $10 billion of potential projects, I think, mostly tied to natural gas. So can you bucket those, or is there a way to think about what those -- a little more color on what those are?

So yes, the opportunities beyond the $9.3 billion backlog is the over $10 billion of potential projects. Now say this, some of those projects won't happen, and we won't win every one, but it's a huge set of opportunities to be working on. I'd say that the $10 billion looks kind of like the $9.3 billion backlog. It's more of the same in terms of -- it is focused on natural gas. So it is almost all natural gas. It is driven by the same demand drivers and supply drivers that we see in the $9.3 billion. So it is power demand, it's export LNG. It is driven -- we have a gathering position in the Haynesville, it's a potential expansion of our Haynesville position. So it's all the same drivers. And I would say in terms of size and scope of projects within that, it looks pretty similar. You have a couple, a few that are big projects, and then you have a lot of singles and doubles in there. And so -- and I'd say, is largely across the Southern United States as you go from Arizona to Florida. But we do have some pipes go in the Northeast. So we have some potential developments there and then some on NGPL that goes into Chicago, a little bit in Colorado, but it is substantially across the Southern United States. So I'm confident we'll get -- we will be able to take some of these projects and ultimately be able to add them to the backlog over time. Now timing is a little bit harder to predict, but the need is there, and we've got a great position to work from with our existing asset base to deliver value to our customers.

So maybe if I push that a little bit. I guess a multipart question here, but some of your potential customers have put some stuff out there. So Southern -- SNG, they sort of intimated that they could spend another $1 billion on another SNG expansion. You've already done one as we know. So curious if you can talk about that at all. And then -- and there's also been Dominion has listed you as a gas supplier for our proposed 2.2 gigawatt plant that I think would be in service in like 2032. So either speak to those projects specifically if you can. But if not, maybe if you could talk about like the process, how this happens, what's the conversation with the customers? How does the project get from development to FID?

Sure. Sure. So the first expansion of our Southern Natural Gas asset, which is a gas pipeline that moves gas into primarily Alabama and Georgia. It's a $3 billion [indiscernible] project. Our partner is Southern. We have some expansion on existing systems as well. And so our share of that project is, I think, approximately $1.8 billion. So a big project for us. I think things are going pretty well, expect a FERC certificate probably next summer, and then we'll start construction. So fully contracted pipe and comes in service mainly in 2029. So -- but I think Southern's continue to see incremental demand in the Southeast. Georgia Power, which is one of Southern's subsidiaries, they filed an amended IRP at the end of November, and they were showing 53,500 megawatts of power demand between now and the 2030s. And so if you look at that, and this is just a rough -- when you convert that to gas demand, just rough math, because there's a whole bunch of assumptions that go in here. That's going to be probably over 10 Bcf a day of gas demand. Now not all of that will be gas, right? And some of that -- a small portion of that is being served by the SS4 expansion. But even if you adjust for those two factors, that's still a huge amount of incremental demand in that market. And that's one utility in one state. You're seeing similar things. You mentioned South Carolina and Dominion and Santee Cooper that power plant that you mentioned there is being served by our Bridge project, which is about a $425 million project that is in our $9.3 billion project backlog, and it comes online in 2030. That's about 325 dekatherms a day, but that pipeline is easily expandable. And so like what we see with Georgia Power and Alabama in Georgia, we expect that those South Carolina utilities will probably add additional demand -- power demand over time and our pipeline -- our bridge pipeline is easily expandable to meet that demand. So what we're seeing in Georgia and South Carolina, that's just a microcosm of what we're seeing across the entire Southern United States and in pockets elsewhere that we -- where we have existing capacity.

So maybe just a follow up on the Georgia example. So 10 Bcf, let's cut that in half, let's just say, make it easy 5 Bcf. I guess a couple of questions. One, how many competing pipelines are you, who are you competing with there for that business, and what are the limitations of what LNG can do in terms of ability to expand further, like is that another factor?

So SNG has got a great position in Georgia and Alabama. And it's got two legs to that pipeline that goes through those states. So it's got a great position to compete from. In the northern part of the state, Transco does go through the northern part of the state. And so there is some competing pipeline infrastructure. And so I'm not saying that we will get 100% of, in your example, the 5 Bcf. I mean it's going to depend on exactly where the power plants are sited, et cetera. And so there's probably going to be that some of the competition gets. But in my mind, in those kind of numbers, there's plenty of gravy to go around, plenty of food to go around. So I think it will -- there's a nice opportunity for a South System 5 Expansion.

Great. I appreciate that. What about -- maybe we turn to Arizona for a minute. So obviously, you had a product that you're developing. It didn't happen fine, but you've said that you still see opportunities to invest in Arizona. So I wonder if you can just elaborate on what that means?

Yes. So two, there's opportunities on the natural gas side and then there's opportunities on the product side actually in Arizona. And so -- let me talk about natural gas real quick, and then I'm going to let Dax talk about the products opportunities. For those of you that don't know Dax, Dax has been with Kinder Morgan for as long as I have. He most recently ran our Products Pipeline business unit and is now the incoming President for Kinder Morgan. So Tom Martin will retire in January, and Dax will take that position. So on the natural gas side, yes, there are more opportunities, just like I said, in the Southeast where Transco will have probably opportunities on some of the power plants depending on exactly where those power plants are, we've got an existing system and that goes out to -- that goes through New Mexico and out to Arizona. And so there's going to be opportunities on power plants in Mexico and other places in Arizona that may not be Phoenix, which is where the new pipeline that competitors scheduled to build is going. There's other places, and there's coal conversions and other places that will need power in Phoenix and Arizona. So I think we're well positioned to compete for some of those opportunities. And so we do see additional opportunities in those states on the natural gas side. And then on the product side, I'll let Dax speaks to that opportunity.

Yes. We got an open season going out there right now in the desert Southwest that actually has brought a lot of interest to a market that's been incredibly boring for probably the last 50 years. But the project, we partnered with P 66, and we're looking at expanding our East line system from El Paso into Phoenix. And also as part of the JV, we would build a line from Borger into El Paso that would bring 2 barrels from Borger as well as Wood River. So the project also would reverse the gold line, which connects Wood River to Borger, would reverse that line, bringing barrels again from PADD 2, Wood River into Borger barrels down to El Paso all the way across the desert into Phoenix. And then our existing system brings barrels from El Paso into Phoenix as well as West Coast PADD 5 barrels from California into Phoenix. That market's about 250,000 barrels a day. Our project would also reverse our West line, so it would clear barrels that are coming into Phoenix -- out of Phoenix and move them into the Southern California basin. So we've got an open season out right now with P 66, that closes in the next 1.5 weeks, couple of weeks. We haven't put a lot of details out because there is a competing project out there, and it's a very, very competitive market. So -- but it's something we're excited about. And hopefully, that will come together. We're pretty enthusiastic about it.

And the dynamic driving that is just the shutdown of refineries in the California market. And so the California refineries right now serve the Phoenix market, Tucson market to some extent and also the Nevada market, specifically Las Vegas and Reno. And so that's what's basically producing that opportunity.

Just one follow-up on that, on the refined products pipeline project. What's the timing? Just can you just lay out the timing of that?

Yes. So the open season closes in the next kind of call it, 1.5 weeks to 2 weeks. I think we'll see what the open season produces, and then we'll get together with our partner. Our expectation is if we have a project that we would probably look to FID sometime in the first quarter.

So I think I know the answer to this question, but I'd like to ask it every now and then. Just on the behind-the-meter power market, which Williams has obviously very -- been very front-footed in. None of the other pipeline companies seem to have really done that. So I'm pretty sure that you're not interested in that. I think I know that. But you had talked about potentially creating some kind of partner structure with other players and then having like a package effectively to deliver to a potential developer or hyperscaler. Can you just talk about where that stands today, if I describe that correctly?

Yes, sure. So you're right on behind-the-meter in terms of building power plants, that's not our cup of tea. That's not our business. And so we've done some new businesses in the past. And it's hard first time that you're doing something and doesn't always go as smoothly as you would like. And so that's why we've passed on that opportunity. But we're seeing huge power demand and opportunities to serve power demand. That includes data centers. Sometimes -- a lot of times, what we've seen early on is it's been the regulated utilities, that are building the power plant. So -- and then the data center demand is contract -- or the data centers, et cetera, hyperscalers are contracting with the regulated utilities. And so we're serving the regulated utilities, which is a great model. We did have a sort of consortium that we put together, bring a power plant developer and a data center developer and us. We haven't found that, that's really necessary to get the gas supply to the power plant or to the data center. We haven't found that, that's been necessary to compete. And so we just -- that's still something that we could do. But in general, we found that we are getting opportunities without having to complicate the task.

Got it. Maybe just last question I think I have on gas is gas storage. So maybe you can -- maybe just start by describing your current footprint? And then; a, do you see just natural uplift in EBITDA as contracts roll, like where is your contracts versus rates today? And then do you see expansion opportunities around your gas storage assets as it relates to everything else we've been talking about.

Sure. So our storage footprint is 700 Bcf, so pretty substantial storage portfolio. And about 75% of that is regulated, meaning the rates that we charge are set by the FERC in conjunction with our shippers generally. And about 25% of it is unregulated. So on the unregulated market, it's just basically market-based rates. You're competing with other people have storage to set those rates. Those rates have increased substantially over the last couple of years. And so typically, it depends, but those storage contracts are 3-ish years. And so you're marking that portfolio to market every three years. And they don't roll -- it doesn't roll ratably. And so -- but you can think about 1/3 of that rolling every year, give or take. So -- but yes, I mean, storage has been great. We've done a couple of expansions. We completed one last year, which was a 6 Bcf expansion on storage facility in Texas. We are doing another store, 10 Bcf expansion of a facility. We actually just got the FERC permit on within the last week on NGPL, which is in East Texas. And then we recently just had an open season for a storage facility that we own in the Southeast and got very good demand on that open season. And right now, in the process of working to put together a project. Brownfield, as you can see from the projects we've done, brownfield development, which just expanding existing storage facilities' works. You can get the rates you need and the contract duration that you need. I'd say in terms of greenfield, that's a little more difficult because generally, to do a greenfield project, to get the rates to where you need them to be, you've got to have five or six or seven customers sometimes because of the size, the scale and scope of that facility. And so getting that number of shippers to sign 10-plus year, 10- or 10-plus year contracts is not there yet. The rates are there, but -- and so -- but I think we're getting close -- a lot closer on the greenfield side.

Okay. I lied, I had another gas question. Sorry. So there's been a lot of -- in the market, like the stock market, there's been a lot of angst about the AI bubble, that's kind of vacillating here and there. I'm wondering if in your discussions with potential customers for incremental gas supply into these power projects, are you seeing any of that hesitation, or is any of that kind of angst around this AI bubble manifesting in your conversations?

Well, I think by the time they're getting to the gas supply piece of it, a lot of time -- I mean, yes, we're having conversations early on, but I think that -- we try to push away the projects that we don't think are going to happen so we can focus on the projects that we think are more likely. And then as we focus on the projects that we think are more likely then we're thinking about, okay, what's the credit here. And that's why you heard me say earlier, doing it with regulated utilities is a nice place to be to have that credit on the other end of the gas supply contract. To the extent that you don't have a regulated utility on the other end, there could be -- we're going to look to determine whether we think collateral is necessary and a lot of times, we do. And so we'll get some form of collateral to help us mitigate cost to make sure we're not going to be out of pot depending on what that credit is. I mean we might require as much as the entire project cost to be backed by an LC or something. That would be someone who doesn't have very good credit, someone that's got better credit than you'd have, but not utility-like credit, then you'd have -- you'd be somewhere in between the two. So that's generally how we think about it, make sure that we have the right credit. So that if you do have a bubble in this market that we've tried to pick the winners, and that where we have a little bit more -- took a little bit more risk. We get higher returns and have a collateral.

Okay. Maybe just a related question on the regulatory and the permitting environment. So I guess the question would be this administration came in sort of touting that they're going to have a better more industry-friendly environment. So I'm curious if you're actually seeing that, or how the -- how do you think they've done so far in terms of making it easier for you to do business to -- yes, permitting as well, which obviously...

So I think they've done a good job so far. I think there's more to do. That's what I'd say. So let me tell you about where I think they've done a good job. So the core of engineers has been very quick on response and permitting, et cetera. And that is a change from what we've seen in the past, their engagement and their responsiveness, and they're issuing a permit is just much faster. On the FERC side, which any time we build an interstate natural gas pipeline of any significant size, we have to have a FERC permit. And we've seen some improvement on the FERC side. The most substantial improvement was they basically retracted what was called 871, which basically was a 5-month period from when they permitted your project to when they would let you start building to give landowners time to appeal and them to resolve those, so they -- which is something that they had only put into effect 2 or 3 years before, and it is just elongated time lines. So they have rescinded that. So that gives us immediate five months benefit. On our big projects, they have said that they're going to issue our permit in 12 months. They've committed to that. That's the schedule that they put out there. And so on some large projects, prior to that, it was taking longer than 12 months. And so them committing to 12 months, I think, is a win. Where we would like to see more is we would like to see that 12 month, and this is on big projects, right? If you're doing a smaller project, it doesn't take 12 months to get a project -- to get a permit. But we'd like to see them compress that 12-month time line more. That being said, we want to make sure that the permits they're issuing are durable. So we don't want them to issue just -- take this to the extreme in one day because then they wouldn't have done the work necessary for that permit to be durable if it was challenged in court. So -- but we think that there is a reasonable basis to have durable permits and be less than 12 months to get there. So we'd like to see some incremental improvements there. And we're actually -- we're working with the FERC to propose some of those changes. So they -- the other thing they did was they took up some of the limits where you don't have to file a permit, or where you can file a very modified permit in terms of the cost of the project. So they -- in one case, it's 1.5x now. So they increase those limits. And so that was -- that's a win as well. So I think we've seen some good progress so far, but would like to see more. And I think at some point that regulatory ends up not being the gating item, you're going to get into the supply chain being the gating item. And in some cases, depending on the project, we're getting close to that. But in other cases, I think there's still room on the regulatory side.

Could you expand on last comment about the supply chain? Where are you seeing the potential...

So on the supply chain, I think the biggest issue is going to be on compression, really. And on our big projects that are in our backlog, we've secured our compression and no concerns. And I think at this point, I feel like we're going to hit our dates there in terms of projected in-service dates. I think it's on new projects, where it can take a longer time. On the interstate projects, again, with the current regulatory environment, generally not a concern, but if you're doing an unregulated project, that can elongate those times. We're seeing some capacity added in the market -- well, not added yet, but going to be added in the future, but it will take time to get that capacity on, get it running smoothly. So I don't think we're going to get help there for maybe another year or so.

Okay. Just one more follow-up on that. I mean there's -- obviously, you and many of your competitors are all pursuing a lot of expansion projects. Do you foresee at some point that labor becomes a constraint, or do you feel like that?

We haven't seen it to date. That doesn't mean we won't see it. I mean we're going to -- we're constantly on the lookout for that. But we've been engaging with a lot of contractors on the big three projects, MSX and South System 4 and Trident, which are $5.3 billion of the $9.3 billion backlog. And to date, we haven't -- those things seem to be about on budget. Now we're not fully done there in terms of getting those contracts, but the preliminary -- we'll try that or essentially done. But on South System 4, for example, on the preliminary numbers we've seen there, it's been within budget.

Maybe if I just turn to capital return for a second. So obviously, you just announced your dividend and your guidance for '26. So that is what it is. But I'm wondering just holistically, your rate of EBITDA and cash flow growth is accelerating. You're going to -- at least on our math, you're going to be growing EBITDA in the next bunch of years faster than the roughly 2% increase in the dividend. So I guess the question is, do you see -- would you consider, or would you think about accelerating cash return as your cash growth improves and what form would that come in? Is that -- could it be a faster dividend growth rate? Is there buybacks? Is there -- or maybe you want to keep that capital, so just curious how you're thinking about?

Sure. Sure. So we've been, again, growing our dividend at about $0.02 the last few years. And that's really just a function of the opportunity set that we have out there on the capital side. And as we said to the beginning of this session, we just raised our expected CapEx guidance for the next couple of years from $2.5 billion -- around $2.5 billion per year to over $3 billion. And so the reason that we've been conservative, I would say, in our dividend growth rate is to preserve that capital and preserve flexibility for all the opportunities that we're seeing out there. And so I think on the other side of some of the CapEx, the over $3 billion. I think it's a -- and then you'll start seeing projects come in service, then it probably makes sense to look at a faster growth than the dividend rate. But I think right now and for the next few years, I think the strategy that we have is the right one.

Okay. And I'll squeeze one more in here...

And then the other thing I'd say in terms of buybacks, that's just going to be opportunistic. And our balance sheet, as I talked about a few minutes ago, 3.8x debt to EBITDA, the high end of our range is 4.5x. Every 0.1x is $850 million. I don't foresee us taking our balance sheet up to 4.5x that we like having that flexibility. But if there were -- if we saw opportunities for share repurchase, we have some capacity there to do that.

So maybe just to round it out in the last -- well, we are over a bit, but it's fine. Just M&A, obviously, there's a lot in your plate organically. So it just feels like maybe you don't need to do anything, but just curious what the landscape looks like? Is it even on the table, or do you just feel like, you've so much internally that it has to be pretty special.

Okay. So I'll say a couple of things, and then I'll let Dax add to it because Dax ran corporate development for a number of years at Kinder Morgan. So look, I think that's part of the reason to keep your -- to keep the capacity on your balance sheet so that when we see opportunities, we can take advantage of them. M&A is opportunistic. You can't schedule it the way you look at an expansion project and, you've got a year down 1 or 2 years down the road, you're going to bring these things in service. I mean those things arise and got to have the flexibility to be able to take advantage of that. We think our balance sheet gives us that. And if you look what we've done in the last couple of years, we did a tuck-in acquisition the beginning of this year in the Highland, we did a tuck-in acquisition in Texas at the beginning of '24. And then I think in '22, I think it was, we did stagecoach versus storage acquisition in the Northeast. So we've been finding opportunities and that $850 million per point 1 turn, that's just straight adding debt. If you're doing an acquisition, and you're adding EBITDA as well, then you've got more capacity or less use of the balance sheet, however you want to think about it. So I think we're in a position where when we see opportunities, we can take advantage of them.

Yes. No, I totally agree. I mean we like M&A. Our company was built on M&A over a 30-year period of time, but you got to be incredibly opportunistic about it. It's very difficult to predict when the opportunities come about. You've got to align economics, social issues, people's willingness to part with stuff at a reasonable price. You don't -- it's generally not a good idea to lock in on something you want and chase it at all costs. That's how you end up with bad deals. So we tend to -- any process that happens in our space, we're generally included in. We generally see what's going on. And so we generally sit back and wait to see what happens and participate when it makes sense. And with respect to selling stuff, people ask about that pretty frequently. We're we're a willing seller at everything we own every day at the right price, and that's a true statement. That's not just a line. But you generally have to have somebody who has a different thesis on an asset, then you do and a lot of people, a lot of people -- there are a lot of introductory conversations about a potential transaction that as time passes, and it gets closer to time to actually kind of check those don't necessarily come to fruition. So we are working on both ends of that all the time. And we're only going to do things when they make sense.

Great. Well, thank you very much for the time this morning. Appreciate it.

Thank you.