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Kinder Morgan (NYSE: KMI)
Q3 2024 Earnings Call
Oct 16, 2024, 4:30 p.m. ET
Key Highlights from Kinder Morgan’s Q3 2024 Earnings Call
- Overview of Financial Performance
- Future Infrastructure Investments
- Management Insights
Overview of Financial Performance:
Operator
Welcome to Kinder Morgan’s quarterly earnings conference call. All participants are currently in listen-only mode. The call is being recorded. Please disconnect if you object.
I will now hand the call over to Mr. Rich Kinder, executive chairman of Kinder Morgan.
Richard D. Kinder — Executive Chair
Thank you, Ted. Before we dive in, I’d like to remind you that today’s earnings report and our discussion will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. It’s crucial to read our full disclosure and review our latest SEC filings for details on potential risks that may lead to differences between anticipated and actual results.
In prior calls, I’ve shared our vision of a robust future demand for natural gas, propelled by LNG exports, exports to Mexico, and electric generation—particularly with the rising energy needs from AI and data centers. This outlook aligns with that of many energy experts. Consequently, we see significant and positive impacts from this growth on our midstream operations.
Financial Insights and Growth Prospects
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Throughout my years in the midstream sector, I’ve never encountered such a favorable macro environment for expanding our natural gas infrastructure. Kinder Morgan intends to be at the forefront of this growth. Recently, we announced the nearly $3 billion South System Expansion 4 Project aimed at boosting our Southern Natural Gas south line capacity by about 1.2 Bcf per day, catering to the rising power generation needs in the Southeastern U.S.
Additionally, we revealed plans to expand our GCX system in Texas. This initiative will allow our long-term customers to transport significantly more natural gas from the Permian Basin. We anticipate sharing more substantial projects in the upcoming months to enlarge our infrastructure network, which we believe will positively influence our EPS, EBITDA, and DCF in a steady and sustainable manner. I will now hand it over to Kim.
Kimberly Allen Dang — Chief Executive Officer
Thank you, Rich. I’ll provide a few highlights before turning over details to Tom and David. For Q3, our earnings per share remained unchanged, while EBITDA rose by 2% compared to the same quarter last year. We anticipate a 5% growth in EBITDA and a 9% increase in EPS for the year despite slightly falling short of our budget due to lower commodity prices and a slower start for our RNG facilities. Our debt-to-EBITDA ratio is stable at 4.1 times. This quarter, we added around $450 million in projects to our backlog.
We placed about $500 million in projects into service, resulting in a current backlog of $5.1 billion. Looking ahead, we see significant growth opportunities in natural gas, driven by LNG, exports to Mexico, and rising power and industrial demands. Ongoing discussions about power opportunities amount to much more than the previously noted 5 Bcf per day.
Several factors are driving this demand. These include migration trends toward the Southern U.S., the CHIPS Act’s implications, competitive feedstock prices, and the need for renewable energy sources that support more natural gas peaker plants.
As coal facilities transition, data center energy needs continue to surge. Each project we develop often stimulates another. For instance, an LNG facility might initially set up a pipeline for natural gas but later needs to secure additional supply sources.
Similar dynamics emerge with power demand where expanding pipeline capacity is crucial to ensure sufficient and reliable energy. Reflecting on my earlier comments, one thing tends to lead to another in this sector. As we explore future projects, some are considerable, estimating between $1.5 billion and $2 billion in costs, while most are smaller investments. Although not every project will materialize, and larger ones may take time to finalize, it’s promising that the potential project list has grown this year, and our discussions have become more concrete.
As Rich highlighted, we have already…
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Strong Growth Ahead for KMI: $3.6 Billion in New Projects Approved
Kimberly Allen Dang — Chief Executive Officer
Kinder Morgan Inc. (KMI) has approved two major projects worth a total of $3.6 billion. This includes $1.8 billion for the Southern Natural Gas South System 4 Project and the GCX expansion. As Rich noted, we anticipate adding to this backlog. This is a promising time for the midstream sector. Now, I will hand it over to Tom for further details.
Thomas A. Martin — President
Thank you, Kim. Let’s start with the natural gas segment. Transport volumes increased by 2% this quarter compared to the third quarter of 2023. Our natural gas gathering volumes were up 5%, mainly driven by production from the Haynesville and Eagle Ford regions, which rose by 10% and 9% respectively.
However, total gathering volumes decreased by 5% sequentially. We project that gathering volumes will average 8% below our 2024 plan, although they are expected to be 5% higher than in 2023. We believe this slight decline in gathering volumes is temporary, as rising production will be necessary to meet anticipated demand growth for LNG in the second half of 2025. We continue to identify significant project opportunities across our natural gas pipeline network, expanding our transportation and storage capabilities to support the increasing demand for natural gas.
In the products pipeline segment, refined products volumes increased by 1%, while crude and condensate volumes decreased by 4% when compared with the third quarter of 2023. For the entire year, we expect refined products volumes to fall slightly below our projections, anticipated to be around 2% over 2023. In terms of development opportunities, KMI’s SFPP pipeline successfully completed a binding open season this quarter, adding 2,400 barrels per day of refined petroleum capacity on the East line system, which runs from El Paso, Texas, to Tucson, Arizona. This project has the potential for further expansion and is expected to be operational by the third quarter of 2025.
In our Terminals division, liquid lease capacity remains high at 95%. Although refining cracks and blending margins have decreased from recent highs, they still support strong rates and high utilization at our key hubs, including the Houston Ship Channel and New York Harbor. All our Jones Act tankers are leased at 100% for 2024 and 97% for 2025, assuming likely options are exercised. Market rates currently exceed our fleet average charter rate, and we expect to renew contracts at higher rates as they expire.
In the CO2 segment, we noticed a 6% decline in oil production volumes, a 3% decrease in NGL volumes, and a 3% increase in CO2 volumes this quarter compared to the third quarter of 2023. For the full year, we expect oil volumes to remain stable relative to our budget. The board has approved two projects associated with recent acquisitions, focusing on developing a CO2 flood at a newly acquired leasehold near SACROC and the second phase of CO2 flood development at Diamond M. We anticipate spending about $145 million on these projects, which are expected to yield peak oil production of over 5,000 barrels a day. I will now turn it over to David Michels.
David Michaels — Chief Financial Officer
Thank you, Tom. For this quarter, we are declaring a dividend of $0.2875 per share, which annualizes to $1.15, showing a 2% increase from our 2023 dividend. We generated revenue of $3.7 billion this quarter, down $208 million from the third quarter of 2023. However, our cost of sales also decreased by $381 million, resulting in a gross margin increase of 7% year-over-year. We recorded net income attributable to KMI at $625 million and earnings per share of $0.28, both reflecting a 17% year-over-year increase compared to the previous quarter in 2023. Additionally, on an adjusted basis, net income was $557 million with an adjusted EPS of $0.25, remaining flat with last year’s results. Significant growth stemmed from our natural gas and terminals segments.
Key drivers included contributions from our newly acquired South Texas midstream assets, improved natural gas transportation, and storage services, along with higher growth project contributions. The products segment saw decreases mainly due to lower commodity prices impacting our inventory valuations. Our DCF per share held steady at $0.49 compared to last year. We experienced increased sustaining capital expenditures, aligned with our budget forecasts for the quarter.
For the full year, we anticipate sustaining capital to match our budget. While this quarter’s performance matched last year’s, broader year-to-date results show an upward trend—EPS has risen by 9% compared to last year, with adjusted EPS up 5% on a year-to-date basis. As Kim highlighted, we expect our full-year adjusted EBITDA to exceed 2023 figures by 5%, and our adjusted EPS by 9%.
Regarding our balance sheet, we concluded the third quarter with $31.7 billion in net debt and a 4.1 times net debt-to-adjusted EBITDA ratio, consistent with our budget. Net debt has decreased by $150 million since the beginning of the year, supported by $4.2 billion in cash flow from operations. We allocated $1.9 billion for dividends, $2 billion toward total capital expenditures, covering growth sustaining investments and contributions to joint ventures, alongside approximately $50 million in other working capital uses. This reconciles with the $150 million net debt reduction.
Now, I will turn it back to Kim.
Kimberly Allen Dang — Chief Executive Officer
Thank you, David. Todd, please come back on so we can open the floor for questions.
Questions & Answers:
Operator
The phone lines are now open for questions. [Operator instructions] The first question in the queue comes from John Mackay with Goldman Sachs. Your line is open.
John Mackay — Analyst
Hi everyone, thank you for your time. You’ve emphasized the growth prospects occurring in various sectors. There are a few projects that seem to be lingering in a sort of ‘shadow backlog.’ Could you provide some context on the size of that backlog compared to last year? Additionally, insights regarding Mississippi Crossing and Trident would be appreciated.
Kimberly Allen Dang — Chief Executive Officer
Certainly. As I mentioned earlier, the opportunities have significantly increased compared to the start of this year and compared to this time last year. While we don’t explicitly categorize anything as a ‘shadow backlog,’ if we did, it would appear considerably larger. The array of projects includes many smaller, lower-risk initiatives that build on our existing infrastructure, generating attractive returns. Further, we have larger projects on the horizon. For instance, we are actively engaging with power plants across multiple states, including Arizona, Arkansas, Texas, Mississippi, Louisiana, Wisconsin, Colorado, and addressing needs in Georgia via the South System 4. On the industrial front, we see developments such as battery and chip production facilities in Arizona, automotive plants in Georgia, and petrochemical ventures driven by domestic manufacturing trends.
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Strong Backlog Signals Growth Ahead for Natural Gas Projects
Corporate Developments and Economic Influences
The CHIPS Act and low commodity prices are helping drive growth in petrochemical plants, supported by inexpensive feedstock. Recent exports to Mexico are being fueled by factors such as power plants, nearshoring, and competitive blended opportunities. Notably, NGPL has recently added a significant 10 Bcf storage opportunity to its portfolio, reflecting its commitment to expansion.
Year over year, our backlog has notably increased. Last year, the backlog was around $3.8 billion; it now stands at over $5 billion, marking a substantial growth of 34%. This change highlights the opportunities we’re recognizing in the current market.
Future Opportunities in Natural Gas Infrastructure
Sital Mody, President of Natural Gas Pipelines, discussed the two open seasons currently in progress. These projects aim to transport gas more efficiently from west to east. The Mississippi Crossing project can potentially transport up to 2 Bcf of gas, connecting to southeast markets, while the Trident project focuses on moving gas from Katy to the LNG corridor in Port Arthur. “We’re enthusiastic about these projects and are actively engaging with our customers,” Mody stated.
Adjusting Growth Expectations
In a recent update, Kimberly Allen Dang, CEO, addressed inquiries regarding expectations for 2024. Although discussions have focused on softer commodity prices, she noted that transmission assets are performing significantly better than anticipated. “We see considerable upside there, which helps to stabilize some of the decline we are seeing in gathering volumes,” Dang mentioned.
Looking ahead to 2025, the introduction of new LNG export volumes could foster a stronger business environment, contingent on weather conditions during winter, market dynamics, and commodity prices. Dang emphasized that additional business segments remain promising thanks to rate escalators, interest rate benefits, and the stabilization of RNG facilities.
Capital Expenditure Insights
Michael Blum, an Analyst from Wells Fargo, sought clarity on the company’s capital expenditure (capex) trends. Dang confirmed they maintain a capex target of around $2 billion per year, although it could occasionally exceed this figure based on project timing. “Our generated cash flow supports roughly $2.5 billion per year in capex,” she outlined, emphasizing their capability to finance projects effectively and manage leverage.
Evaluating Project Returns
The diversity of projects in the backlog raises questions about expected returns. Dang reassured that current return rates remain consistent with historical trends. “Different projects yield varied returns based on the implementation timeline, but the South System 4 project aligns with our typical expectations,” she noted.
This indicates a stable outlook for investors, despite fluctuations in individual project profitability.
In summary, as outlined in this quarterly call, the company is poised for strong growth driven by a growing backlog, strategic infrastructure investments, and a resilient natural gas market.
Kinder Morgan Discusses Mississippi Crossing and Future Projects in Latest Conference Call
Commercial Drivers Behind Mississippi Crossing
Allen Dang — Chief Executive Officer
Hey, Theresa. Theresa?
Operator
Please check your mute button.
Theresa Chen — Analyst
Can you hear me now?
Kimberly Allen Dang — Chief Executive Officer
Yeah.
Operator
We can hear you.
Theresa Chen — Analyst
Sorry about that. Focusing on the Mississippi Crossing project, can you explain the commercial factors that may lead Kinder Morgan to successfully secure this project, should the binding open season go well? How much do you think this interest is influenced by customers wanting to diversify their supply sources beyond the Northeast Mid-Atlantic corridor?
Richard D. Kinder — Executive Chair
Theresa, that’s a great question. As we have mentioned earlier, the increase in LNG exports from the Gulf Coast highlights the growing need for added supply. This need isn’t just about diversifying sources; it’s also about having direct access to the physical gas to meet future demand. Thus, establishing access to various basins, in addition to the established ones, is key.
Potential Separation of Natural Gas and Liquids Assets
Theresa Chen — Analyst
Understood. Shifting gears, competitors have recently achieved success by separating their liquids business from natural gas assets. Have you considered doing something similar to highlight the value of each segment more effectively?
Kimberly Allen Dang — Chief Executive Officer
We believe retaining a combined approach has strategic advantages. Owning both natural gas and product pipelines is beneficial; for example, our integrity team manages both areas, leading to efficiencies. Fragmenting these services would likely create challenges and possibly degrade value. Presently, if we look at how we’re positioned, splitting these divisions would show a significant discount in terms of market valuation. Therefore, the costs and chances of losing efficiency do not currently justify such a move.
Moreover, any separation would rely heavily on market conditions, and we need very clear insights regarding post-separation valuations to take on that risk.
Cumberland Projects and Court Decisions
Theresa Chen — Analyst
Thank you for clarifying that.
Operator
Next up is Zack Van Everen from TPH. Your line is open.
Zack Van Everen — Tudor, Pickering, Holt and Company — Analyst
Thanks for taking my question. To start, can you elaborate on the U.S. court’s recent decision regarding your Cumberland projects and what steps you plan to take moving forward?
Kimberly Allen Dang — Chief Executive Officer
Absolutely. The 6th Circuit’s recent stay on our Army Corps and Tennessee permits means we can’t initiate construction. We believe this ruling is misguided and based on flawed reasoning. Our project aims to supply natural gas to a power plant shifting from coal, which the FERC has found will help reduce greenhouse gas emissions.
Over the last decade, we’ve faced opposition to our permits from anti-fossil fuel groups, but we’ve generally triumphed in court. For example, the D.C. Court of Appeals has recently upheld our FERC permits on multiple projects. We are now collaborating with the Army Corps and TDEC to identify our next steps, expecting both agencies to defend our permits vigorously.
Gulf Coast Express Expansion Timeline
Zack Van Everen — Tudor, Pickering, Holt and Company — Analyst
That sounds clear. Moving on, when do you anticipate a final investment decision on Gulf Coast Express? I recall that the Permian Highway took about a year.
Thomas A. Martin — President
The Permian Highway project took approximately 19 months. For Gulf Coast Express, we’re anticipating a slightly conservative timeline of around 22 months, factoring in the significant demand for compression and electrical components. Therefore, we are aiming for a mid-’26 in-service date, which is not drastically longer than what the Permian Highway took.
Demand and Risks in 2026
Operator
Up next is Jean Ann Salisbury from Bank of America. Your line is open.
Jean Salisbury — Bank of America Merrill Lynch — Analyst
Hi. With the Gulf Coast expansion and the Blackcomb projects, there will be substantial gas directed toward the Agua Dulce region. Is there a chance that the demand might not keep pace in 2026, particularly if LNG projects encounter delays? How is the GCX expansion prepared to address this potential risk?
Kimberly Allen Dang — Chief Executive Officer
This is an excellent question. Delays in LNG demand centers could expose us to pricing volatility. However, we incorporate downstream options for our customers, which provides some built-in flexibility. While volatility is likely, storage assets can play a critical role in managing that situation as we approach that timeframe. It’s a possibility, but not something we view as inevitable.
Richard D. Kinder — Executive Chair
One important point to note is that we have long-term contracts with our shippers.
Kimberly Allen Dang — Chief Executive Officer
Exactly. Our long-term agreements help mitigate risk. Additionally, our Texas Intrastate business offers opportunities for us to buy and sell gas based on market conditions, potentially allowing us to purchase gas at lower rates if prices drop. We are also exploring expanding our pipeline systems from Agua Dulce to Katy, which could open up further opportunities depending on market dynamics.
Future Outlook: Kinder Morgan’s Potential Growth with Market Insights
Jean Salisbury — Bank of America Merrill Lynch — Analyst
The dynamics in the storage market seem promising. Thank you for your insights. At your recent Investor Day, you mentioned having 200 Bcf of storage at market rates. Will this continue to be a benefit in the coming years, especially considering current market rates?
Kimberly Allen Dang — Chief Executive Officer
About 25% of our storage operates at market-based rates. We have rolled some contracts, while others are yet to be renewed. The storage market remains strong, and current rates are on the rise. Just this week, we finalized a three-year deal which set a new record for us in storage services. It’s an encouraging sign, but keep in mind that these contracts typically roll over about one-third each year.
Jean Salisbury — Bank of America Merrill Lynch — Analyst
That’s very helpful. Thank you.
Operator
Next, we have Neal Dingmann from Truist Securities. Your line is open.
Neal Dingmann — Analyst
Good afternoon. First off, regarding your backlog, should we expect it to remain around $5 billion? It seems you have many opportunities ahead but also several projects set to launch soon. How do you see this playing out?
Kimberly Allen Dang — Chief Executive Officer
We haven’t forecasted a detailed update for our backlog yet, Neal. While we know it increased from $3.8 billion a year ago, we expect some projects to complete, but we also see chances to add significant new projects. If we can secure those, our backlog could grow further.
Neal Dingmann — Analyst
That’s encouraging. My second question is about the CO2 portfolio. In the last quarter, you mentioned your capital spending would likely remain stable. Should we expect this to continue, especially with developments in SACROC and North El?
Kimberly Allen Dang — Chief Executive Officer
Indeed, as Tom mentioned, our board just approved $150 million for new CO2 flood projects. This addition could yield an extra 5,000 barrels per day, a significant figure relative to our current production. Anthony, do you want to add anything?
Anthony B. Ashley — President, CO2 and Energy Transition Ventures
On a yearly basis, we plan to invest about $200 million in expansion. That setup is quite stable, so no substantial increase is expected in the short term.
Neal Dingmann — Analyst
Thank you for the clarity.
Operator
Next, we have Jeremy Tonet with JPMorgan. Your line is open.
Jeremy Tonet — Analyst
Hello and good afternoon.
Kimberly Allen Dang — Chief Executive Officer
Hi, Jeremy.
Jeremy Tonet — Analyst
First, I want to extend a belated happy birthday to David. Now, I have a question about operating leverage for Kinder. With excess capacity in gathering and pipeline systems, what potential do you see for capital-efficient growth? If demand increases, how might this impact Kinder Morgan?
Kimberly Allen Dang — Chief Executive Officer
We do have some gathering capacity in places like the Eagle Ford, though expanding processing facilities in that area would be essential. In pipelines, we have ample capacity in the Eagle Ford, but we’ll likely need to add laterals and possibly some treating systems elsewhere like the Bakken. In general, expansions on the gathering and processing side can be achieved efficiently. As for transmission pipes, they’re running at high utilization rates, and additional growth will mainly come through contract renewals.
Jeremy Tonet — Analyst
Thanks for the explanation. I also wanted to address power demand, particularly for large clients and data centers. How far upstream could Kinder expand? Are you considering contracts to supply gas or even electricity through gas generation?
Kimberly Allen Dang — Chief Executive Officer
We can supply gas directly to power plants, whether behind or in front of the meter. The distinction between the two doesn’t affect our capability. We’ve also discussed the idea of placing a power plant near our storage facilities, which would offer high reliability, especially beneficial for nearby data centers. We haven’t solidified plans yet, but it remains a potential avenue for us.
Jeremy Tonet — Analyst
That’s great to hear. Thank you for the insights.
Operator
Next in the queue, we have Keith Stanley with Wolfe Research. Your line is open.
Keith Stanley — Analyst
Thank you. I have two clarification questions. First, you mentioned that you could fund $2.5 billion annually for growth capital expenditures from cash flow. Would you be comfortable increasing that amount?
Strategic Insights from Kinder Morgan’s Recent Earnings Call
CEO Kimberly Allen Dang Discusses Financial Metrics and Capex Plans
Kimberly Allen Dang — Chief Executive Officer
Currently, Kinder Morgan operates at a debt-to-EBITDA ratio of 4.1 times, with expectations to finish the year near 4 times. The company has set a ceiling at 4.5 times, noting that each 0.1 increase corresponds to approximately $700 million in additional debt.
Dang explained that incremental capital expenditures (capex) could be financed through debt, provided that the cash flow generated from these projects would eventually lower the debt-to-EBITDA ratio over time. Furthermore, she emphasized that for high-return projects, finding capital support is feasible, either through internal resources or partnerships with private equity.
Executive Chair Richard D. Kinder Highlights Balance Sheet Strength
Richard D. Kinder — Executive Chair
Kinder reaffirmed that the company is committed to maintaining a robust balance sheet while addressing its capital needs for future projects.
Keith Stanley — Analyst
In response to concerns regarding court reviews, Stanley pointed out that some of Kinder Morgan’s peers have faced challenges. He asked whether the company sees increased risk after the recent Chevron decision and if there are strategies to handle potential permitting issues.
Kimberly Allen Dang — Chief Executive Officer
In addressing the Chevron Doctrine, Dang stated that it has not influenced decisions related to their ongoing projects, such as Cumberland. She recounted past experiences with PHP, where multiple challenges were successfully navigated. Current strategies focus on ensuring that all permits obtained are defensible against potential legal challenges.
According to Dang, while it is expected that challenges will arise, the company will incorporate these considerations into its strategy for deploying capital moving forward, just as it has done successfully over the past decade.
Closing Remarks from Executive Chair Richard D. Kinder
Keith Stanley — Analyst
Thank you.
Operator
And I’m showing no further questions at this time.
Richard D. Kinder — Executive Chair
Thank you all for joining us this afternoon. Have a good evening.
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants:
Richard D. Kinder — Executive Chair
Kimberly Allen Dang — Chief Executive Officer
Thomas A. Martin — President
David Michaels — Chief Financial Officer
Sital Mody — President, Natural Gas Pipelines
Anthony B. Ashley — President, CO2 and Energy Transition Ventures
Additional Analysts
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