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

Good morning, everyone. Thank you so much for joining us. My name is Theresa Chen, and I'm the midstream and refining analyst here at Barclays. It is my pleasure to introduce our next company, Kinder Morgan. With us from Kinder is CEO, Kim Dang. Welcome, Kim.

Thank you, Theresa. Nice to be here.

Thank you very much for being here. There is quite a bit happening across your footprint. We're going to go segment by segment effectively, but maybe beginning with the natural gas side of things. I want to begin with a discussion of your project commercialization plans through year-end. As highlighted in the second quarter earnings, you expect to sanction at least $1.4 billion in new natural gas projects by the end of this year. Would you be able to provide any color on these late-stage opportunities and how they could strategically enhance Kinder's broader transmission footprint.

Sure. So let me start by saying that the natural gas segment is about 2/3 of our business. So it is -- and it is the area where we expect the most growth. So as you said on our fourth -- on our second quarter call, we talked about -- at least $1.4 billion of projects. And just so that -- to give a little background for people -- at the end of the first quarter, our backlog was about $10.1 billion. And then it reduced in the second quarter to about 9.6% as a result of projects that we put in service. And so what we said and for the balance of the year, so the back half of the year, we expect to put another $1 billion of projects in service. And so what we said is that we think that we will at least get back over $10 billion in our backlog by the time we get to the end of the year. So expecting the backlog to be $10 billion or likely more by the end of the year. And I think it's important also that people understand a lot of different companies have backlogs and GE has a certain backlog. Our backlog, so that people understand what it is, is approved -- Board-approved projects. And generally, 90% of them are backed by take-or-pay contracts, the ones that are in our CO2 business and some smaller gathering projects that have dedications as opposed to take-or-pay. And generally, those types of projects have higher returns. So these are projects that we are moving forward with. But I think the reason that we have so much confidence about adding projects to the backlog is just a result of the environment that we're in and all the opportunity set that we're working on. the opportunity set that we're working on that's not in the backlog is like $10 billion. We won't get all those projects, but we'll get our fair share. And it's really driven by the growth in the natural gas market. WoodMac shows that the natural gas market is going to grow from like 115 Bcf a day, almost 115 Bcf in 2025 to like 160 Bcf by 2035, like 46 Bcf a day of growth in the natural gas market, primarily driven by export LNG and power, export LNG numbers like 23 Bcf and the power number is like 17 Bcf. And so that's just driving enormous opportunities for us A lot of those opportunities are across the Southern United States. The $10 billion is composed of some really big projects and then a lot of singles and doubles kind of like our existing backlog is today. But the growth combined with the asset footprint that we have, the 80,000 miles of pipe, we serve 40% of the natural gas demand in the United States. We move 40% of the volumes that go for export LNG. We move 50% of the exports to Mexico. Those 2 things combine the nature of our footprint and the tremendous amount of demand is what gives us so much confidence that we'll be able to replenish that backlog over the course of this year.

It makes sense. And I mean I'm happy that you touched both on the macro outlook for natural gas as well as defining what backlog means to you because, understandably, Kinder's backlog is sanctioned bonafide carbon stone, and that word means different things across your competitors. So as these late-stage natural gas opportunities materialize and move into the sanction backlog and looking at that sanction set of projects in general, how should we think about the impact to your medium-term earnings lot trajectory?

Sure. So what we do for people is on the backlog, we give them a multiple, right? And so if you look at our backlog, 90% of it roughly is in these take-or-pay type of contracts, and that's the ones we put a backlog on. So $8.2 million or $8.5 million of the $9.6 million is associated with those type of projects, and we have a 5.6x multiple on those. The $1.2 million of other projects is gathering and processing and also the oil and gas production in our CO2 business. And those projects actually come at higher returns than the 5.6 multiple. It's just that the nature of that cash flow is that it increases and then over time, it begins to decrease and so you get more of your return upfront. So actually, the upfront multiple on those projects is even better. So if you -- so to make it simple, just take the 5.6 on the full $9.6 billion, that's $1.7 billion of incremental EBITDA that we expect and the average in service on our backlog is the really the first half of 2028. And so those projects will largely contribute growth, some in but a lot more in '28 and in 2029. As we add projects, that will extend out that growth because as you add projects and their FERC reg -- a lot of them will be FERC regulated. They'll take a couple of years to get permitted or 2 to 3 years probably to get permitted and come online. So little will extend out. So the projects that probably are in -- the projects that are in the at least $1.4 billion are going to be things that comment online in service at the end of 2029 and into 2030. So what it does is it extends out the growth trajectory that's coming from the growth backlog.

Sure. Just by nature of the time it takes to bring these process projects to fruition and when they will actually contribute earnings certainly. Now understanding that the vast majority of your business is insulated from direct commodity price exposure and largely indirect as well given the old metric commitments or cost of service nature of the contracts. But for your supply push assets, even if they themselves are not bearing commodity risk, I am curious as far as your customer discussions with your producer customer base, as they frame their own expectations into the next year against the backdrop of a sustained commodity price volatility Curious to hear from a bowling metric perspective, where do you see the most near-term growth potential across your diversified footprint given this commodity price outlook?

Sure. So if you look at our gathering assets, our gathering and processing business is about 9% of Kinder Morgan overall. So as you said, not a huge driver of growth. But the -- and natural gas is like 90% of that. So 8% of the 9% is all in natural gas. And it's largely in 3 basins. It's in the Haynesville. It's in the Eagle Ford, and it's in the Bakken, are the 3 primary basins where we have the gathering. And certainly, that is going to be a tailwind for us. If you, again, go back to WoodMac and the 46 Bcf a day of demand, where is that supply coming from? And that supply is projected to come from 3 primary basins that's coming with Marcellus, Utica, which is like 13 Bcf a day. It's coming from the Haynesville, which is about 13 Bcf a day. It's coming from the Permian, which is roughly 11 Bcf. Those are the 3 primary, but then they also have the Eagle Ford growing by like 4 or 5 Bcf, I think. And so if you overlay that with our footprint, our biggest gathering position is in the Haynesville. We've seen big volume increases over the first half of this year in the Haynesville and expect with those demand -- the growth numbers that WoodMac is projecting for that to continue over the near term, medium term. The Eagle Ford will benefit from that growth as well. And then in the Bakken, that's primarily an oil play. We expect oil volumes to be relatively flat. But because of increasing GORs, we expect that the natural gas volumes will continue to increase. So definitely on the 9% that gathering, we see some nice tailwinds there.

Okay. That's a very comprehensive outlook and answer to my question. Thank you. Okay. On the transmission side of things, turning to the unsanctioned backlog, I want to ask you about TGP. This is a critical corridor, key asset within your system, critical corridor for not just Kinder but producers and consumers at large. Your proposed TGP expansion following the conclusion of the nonbinding open season in August, a, can you elaborate on the strategic benefits in general of this project? And how observed customer demand. How did that come about compared to your initial expectations given the competitive landscape?

Sure. So what Theresa is referencing is an expansion on TGP, which would take volumes from the Marcellus, Utica sort of in Northwest Pennsylvania and move them south down into Tennessee or near Nashville kind of is where the delivery point is on that. And it would be a little over 500 million cubic feet a day is what was open season. It was nonbinding. We got tremendous interest in that. Really, the play here is -- the Marcellus Utica right now is constrained in terms of getting gas out by pipeline, lack of incremental pipeline capacity. And I think, ultimately, most of that gas is going to need to come south. I mean there will be some -- expanding north is difficult. And there's some small incremental expansions here and there to the north. But really to get the level of supply out that WoodMac suggests you're going to need expansions coming to the south to get that 13 Bcf a day out of the Marcellus Utica. And so this is a project that would start that, and we get 500 Bcf a day. It really goes into Tennessee. So it's intended to serve power plants that are in Tennessee, Kentucky, West Virginia largely, potentially Ohio. And so that's really the driver of that demand. And so right now, what we're doing is we're following up with all the parties that bid in the nonbinding open season to determine when is their need, where exactly do they need the deliveries, et cetera. And then based on that, assuming that we can get the customer interest that we believe is there, then we would have a project. But those things take a couple of quarters to all come together.

Okay. Very fair. And understanding that the corridor 2 at Tennessee incredibly important to solidify that interest into binding commitments. But I know your ambitions lie beyond Tennessee as well on TGP. So if this expansion has contemplated materializes, can you talk about how this project could pave the way for future expansions across your Southeast footprint including MSX, as a stepping stone for SC5 on SNG. And then how do you view the competitive landscape given Borealis has been out there local politics, notwithstanding as well, but feel free to comment on any...

Yes, sure. So I think the Marcellus Utica needs outlets for its gas in order to grow. And the Southeast is going to have a lot of incremental demand. And a lot of that's going to be driven largely by power. But you can get those molecules also and potentially into the export LNG. So meeting really the 2 big drivers of demand. And so longer term, I think the play is to get those molecules out of the Marcellus Utica down into export LNG and down into power demand across the Southern United States. And so one way to do that would be to continue the expansion. TGP, you can continue south on TGP from the Tennessee area, down south where TGP actually connects with one of our newer pipeline that we'll start building this fall called Mississippi Crossing. And so you can take it south. It requires expansion of TGP. It would definitely requires some line looping potentially. But and then you could move across MSX. MSX has a very small amount of capacity left on the initial build, but you can also do some compression expansions and then ultimately, you could do some looping, and MSX feeds it into South system 5. And then you can also get the -- you can backflow the molecules as well to get into export LNG. So there's a lot of different ways to feed that demand, but that's one of them. And it's just -- it's a great opportunity for us in the Southeast for sure.

Got it. And then on the Texas side of things, your transmission footprint there. So the initial phase of Trident is set to enter service early next year. followed by Phase 2 in the fourth quarter of 2028. And given your comments earlier about the merchant call on U.S. LNG, are you observing incremental demand for a possible Phase 3 of Trident beyond the 2 Bcf per day of sanctioned capacity at this point?

So Trident is our pipe that moves gas. That's in construction right now. The first phase will be finished in the first quarter of next year. It moves gas from Houston area, Katy -- up around Houston down over to Port Arthur, so over into East Texas and then ultimately connects into pipelines that go into Louisiana. And so -- the first phase will be complete in 2027. And then the second phase will be done in late 2028. But we do have the -- there is a small amount of incremental capacity left on the initial Phase 1, Phase 2 project, but it's relatively small. And so beyond that, there's expansion capabilities. And depending on how much you want to add, it depends on whether it's just compression or whether you need compression and piping. But I think we can serve both the Texas LNG demand and also potential demand over in the Southwest Louisiana. And so that longer term, that is a nice opportunity for us as well.

Okay. Great. And in the Permian, when we look about other conduits of expansion, so the introduction of incremental to do capacity has driven Waha basis narrower and faster than previously expected, with more to come still. So how has this impacted your expectations for the timing of the next wave of Permian residue egress given how quickly this first phase has filled up. And would you touch on maybe your outlook on a previously discussed small-scale westward expansion of PNG.