Kinder Morgan Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 16, 2024

Key Takeaways

  • Robust growth outlook: Kinder Morgan highlighted a “macro environment so rich with opportunities” as LNG exports, Mexican demand and power generation tied to AI and data centers drive substantial $3 billion+ expansions like South System 4 and GCX projects.
  • Solid Q3 results: EPS held steady, EBITDA grew 2% year-over-year, and full-year guidance remains at +5% EBITDA and +9% EPS despite lower commodity prices and RNG startup delays; backlog jumped 34% to $5.1 billion.
  • Diversified segment performance: Natural gas transport and gathering volumes rose, products pipelines and terminals maintained high utilization, and the CO₂ unit won Board approval for $145 million in flood development projects.
  • Strong cash generation: Q3 dividend rose 2% to $0.2875/share, gross margin improved 7%, net income climbed 17%, DCF/sh remained flat, and net debt edged down to $31.7 billion (4.1× EBITDA).
  • Regulatory headwinds: A 6th Circuit stay on key Cumberland project water and air permits will delay construction and underscores ongoing legal risks to pipeline expansions.
AI Generated. May Contain Errors.
Earnings Conference Call
Kinder Morgan Q3 2024
00:00 / 00:00

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Operator

Welcome to the last to the quarterly earnings conference call. At this time, all participants are in a listen-only mode. During the Q&A session, if you'd like to ask a question, you may press star one on your phone. Today's call is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

Okay, thank you, Ted. Before we begin, as usual, I'd like to remind you that KMI's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

Over the past few quarters, I've talked about our view of the future demand for natural gas, with strong growth being driven by LNG exports, exports to Mexico, and electric generation, which is benefiting from the tremendous needs of AI and data centers. Our viewpoint is consistent with most other energy leaders and analysts in the field. So the next question is, what's the impact of this growth on a midstream company like Kinder Morgan? We believe it's substantial and positive. In fact, in my decades of experience in the midstream arena, I've never seen a macro environment so rich with opportunities for incremental build-out of natural gas infrastructure, and at Kinder Morgan, we expect to be a major player in developing that infrastructure.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

In July, we announced the approximate $3 billion South System Expansion 4 project, which is underpinned by long-term shipper commitments and designed to increase our Southern Natural Gas South line capacity by approximately 1.2 BCF per day, helping to meet growing power generation and residential commercial demand in the Southeastern U.S. market. Today, we are announcing the expansion of our GCX system in Texas, which will enable our customers who have signed long-term throughput agreements to move substantial additional gas out of the Permian Basin. We expect to announce additional significant projects over the next several months that will allow us to expand and extend our network to better serve the needs of our customers and benefit our bottom line. As these projects come online, we should be able to grow our EPS, EBITDA, and DCF on a consistent and sustainable basis for years to come.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

With that, I'll turn it over to Kim.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Okay, thanks, Rich. I'll make a few points, and then I'll turn it over to Tom and David to give you more details, but for the third quarter, earnings per share was unchanged. EBITDA grew by 2%, versus the third quarter of last year. For the year, we expect EBITDA growth of 5% and EPS growth of 9% versus 2023, despite our expectation to be slightly below our budget due to lower commodity prices and slow startup of our RNG facilities. Debt to EBITDA remains at 4.1x. During the quarter, we added roughly $450 million of projects to the backlog, which includes the GCX expansion that Rich mentioned, but also includes a storage expansion on NGPL and a new lateral to serve a natural gas power plant.

Kim Dang
Kim Dang
CEO at Kinder Morgan

We placed roughly $500 million of projects in service, resulting in a current backlog of $5.1 billion. As we look to the future, we continue to see large opportunities for growth in natural gas between LNG exports to Mexico, power, and industrial growth. Current discussions on power opportunities total well north of the 5 BCF a day we mentioned in the second quarter. Our internal number for growth in the overall natural gas market is roughly 25 BCF a day over the next 5 years. On the power side, there are numerous drivers of that demand. We see population and business migration to the Southern United States, from Arizona to Texas to Georgia and Florida, and what were already tight energy markets. The CHIPS Act, cheap feedstock prices, and national security are leading to onshoring and nearshoring.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Renewables are leading to the need for more natural gas peaker plants to back up intermittent demand. Coal plants are moving forward with conversion, and of course, data center demand has skyrocketed. Regardless of the demand driver, one project often creates a need for a subsequent project. For example, an LNG facility initially builds or contracts for a header pipe to get natural gas to its facility from the closest liquid market. Over time, it contracts for capacity upstream of that liquid point to secure more attractively priced molecules. In addition, we have seen some of these companies subscribe for capacity on an entirely separate path to achieve diversity of supply. We see somewhat similar dynamics on the LDC and power demand side. Projects to expand existing pipeline capacity within the demand areas, and then a desire to reach further back to ensure sufficient and diverse supply.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Kind of reminds me of the old song by The Fixx, One Thing Leads to Another. As we look at our future opportunity set, a few of the potential projects are very large, $1.5-$2 billion. Most are singles and doubles. As I said last quarter, not all the projects will come to fruition, and the larger projects can take longer to develop. But the opportunity set has continued to increase over the course of this year, and the conversations are becoming more focused and specific. As Rich mentioned, we've already approved two large projects totaling $3.6 billion 8/8ths, $1.8 billion to KM share between Southern Natural Gas, the Southern Natural Gas South System 4 project and the GCX expansion. And I expect, as Rich said, we'll continue to add to this backlog.

Kim Dang
Kim Dang
CEO at Kinder Morgan

It's an exciting time to be in the midstream business, and with that, I'll turn it over to Tom to give you more details.

Tom Martin
Tom Martin
President at Kinder Morgan

Thanks, Kim. Starting with the natural gas business unit, transport volumes increased 2% in the quarter versus the third quarter of 2023. Natural gas gathering volumes were up 5% in the quarter compared to 2023, driven by Haynesville and Eagle Ford volumes, which were up 10% and 9% respectively. Sequentially, total gathering volumes were down 5%. For the year, we expect gathering volumes to average 8% below our 2024 plan, but 5% over 2023. We view the slight pullback in gathering volumes as temporary, as higher production volumes will be necessary to meet the demand growth from LNG expected in the second half of 2025. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation and storage capabilities in support of the growing natural gas market.

Tom Martin
Tom Martin
President at Kinder Morgan

In our products pipeline segment, refined products volumes were up 1%, and crude and condensate volumes were down 4% in the quarter compared to the third quarter of 2023. For the full year, we expect refined products volumes to be slightly below our plan, but 2% over 2023. Regarding development opportunities, KMI's SFPP pipeline closed a successful binding open season during the quarter to add 2,400 barrels per day of additional refined petroleum products capacity on its East Line system for transportation services from El Paso, Texas to Tucson, Arizona. The project can be expanded further and is expected to be in service during the third quarter of 2025. In our terminals business segment, our liquids lease capacity remains high at 95%.

Tom Martin
Tom Martin
President at Kinder Morgan

Refining cracks and blending margins, though down from recent highs, remain constructive and supportive of strong rates and high utilization at our key hubs in the Houston Ship Channel and New York Harbor. Our Jones Act tankers are 100% leased through 2024, and 97% leased in 2025, assuming likely options are exercised. The current market rerates remain above our fleet average charter rate, and we expect to recontract at higher charter rates as contracts come up for renewal. The CO2 segment experienced lower oil production volumes at 6%, lower NGL volumes at 3%, and higher CO2 volumes at 3% in the quarter versus the third quarter of 2023. For the full year, we expect oil volumes to be roughly flat to budget. The board approved two projects today associated with our acquisitions over the last couple of years.

Tom Martin
Tom Martin
President at Kinder Morgan

These projects include the development of a CO2 flood at the undeveloped leasehold adjacent to SACROC that we acquired in June, and the second phase of the CO2 flood development at Diamond M. We expect to spend a combined $145 million on these projects, resulting in a peak oil production of greater than 5,000 barrels a day. With that, I'll turn it over to David Michaels.

David Michels
David Michels
VP and CFO at Kinder Morgan

Okay, thanks, Tom. So for the quarter, we're declaring a dividend of $0.2875 per share, which is $1.15 annualized, up 2% from our 2023 dividend. For the quarter, we generated revenue of $3.7 billion, down $208 million from the third quarter of 2023. However, cost of sales were also down, and those were down by $381 million. So putting those two together, gross margin increased 7%, versus last year. Additionally, we generated net income attributable to KMI of $625 million, and earnings per share of $0.28, both 17% higher than the third quarter of 2023.

David Michels
David Michels
VP and CFO at Kinder Morgan

On an adjusted net income basis, which excludes certain items, we generated $557 million and adjusted EPS of $0.25, which is flat with last year. We saw year-over-year growth from our natural gas and terminals businesses. The main drivers were contributions from our acquired South Texas midstream assets, greater contributions from our natural gas transportation and storage services across our networks, as well as higher growth project contributions. Our product segment was down mainly due to lower commodity prices and the associated impact on our inventory valuations. DCF per share was $0.49, flat with last year. We experienced higher sustaining capital versus last year in the quarter, which is consistent with how we budgeted for it. For the full year, we expect sustaining capital to be in line with budget.

David Michels
David Michels
VP and CFO at Kinder Morgan

The quarter is pretty flat with last year, but if you look at a year to date, on a year-to-date basis, performance is nicely up. EPS is up 9% over last year, and our adjusted EPS is up 5% on a year to date basis versus last year. As Kim mentioned, while we expect to trend a little bit below budget for the full year-

David Michels
David Michels
VP and CFO at Kinder Morgan

... we expect our full-year adjusted EBITDA to be 5% higher than 2023, and our adjusted EPS to be 9% higher than 2023. On our balance sheet, we ended the third quarter with $31.7 billion of net debt and 4.1x net debt to adjusted EBITDA, which is consistent with where we budgeted to end the quarter. Our net debt has decreased $150 million from the beginning of the year, and here's a high-level reconciliation of how that change occurred. We've generated $4.2 billion of cash flow from operations. We've spent $1.9 billion in dividends. We've spent $2 billion in total CapEx. That includes growth, sustaining, and our contributions to our joint ventures.

David Michels
David Michels
VP and CFO at Kinder Morgan

And we've had $50 million, approximately, of other working capital uses, and that gets you close to the $150 million decrease in net debt for the year. Now I'll turn it back to Kim.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Okay, thanks, David. Chad, if you'll come back on, we'll open it up to questions.

Operator

The phone lines are now open for questions. If you would like to ask a question over the phone, please press star one and record your name. To withdraw your question, press star two. The first question in the queue is from John Mackay with Goldman Sachs. Your line is open.

John Mackay
John Mackay
VP of Equity Research at Goldman Sachs

Hey, everyone. Thank you for the time. Look, you spent a lot of time, again, talking about the growth potential that you're seeing coming back across power, et cetera. You have a couple projects that are floating around, kind of not quite in the backlog yet. I guess, we used to call that shadow backlog. I guess I'd just be curious if you could kind of frame up the size of that relative to, let's say, this time last year. And then if you could maybe touch on, in that context, maybe Mississippi Crossing and Trident. That'd be great.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Sure. I mean, I think, as I said earlier, you know, the opportunity set has continued to increase versus from the start of this year and even more since this time last year. And so, I mean, we don't technically have a shadow backlog, but if we did, I would expect that you would see a big increase in that. And so those projects range a lot of singles and doubles, which are great. I think those projects have less risk, and they are generally built off of our existing network, and they're very nice returns. And then we have some, you know, that could be much larger.

Kim Dang
Kim Dang
CEO at Kinder Morgan

But you know, if you look at, for example, you know, the power opportunity, you know, we are talking to you know, power plants in Arizona and Arkansas, and Texas, and Mississippi, and Louisiana, and Wisconsin, and Colorado, and then obviously, you know, we're addressing the Georgia need through the South System 4. You know, things you're seeing on the industrial side, you know, you're seeing battery plants and chip plants in Arizona, you're seeing auto plants in Georgia, petrochemical plants on the U.S. That's you know, driven by the onshoring, that's driven by the CHIPS Act, and that's driven by the fact that we've just got very cheap commodity prices here, so cheap feedstock for these petrochemical plants. On the export to Mexico, that's driven by you know, power plants, that's driven by nearshoring, that's driven by export LNG.

Kim Dang
Kim Dang
CEO at Kinder Morgan

We've got CCS opportunities on petroleum products side. You know, we've got a number of blending opportunities we're working on. There's opportunities on the storage side. As I said today, we NGPL added a ten BCF storage opportunity. We added our share of that to the backlog. And then, you know, on natural gas. Our backlog itself has grown significantly from last year. I don't remember the exact number, but I think it was in the threes or below this time last year, and now we're over five. So, you know, that gives you some sense of the things that we're seeing.

Kim Dang
Kim Dang
CEO at Kinder Morgan

You know, also, since this time last year, you know, we were saying $1 billion-$2 billion a year in expansion CapEx, and we updated that more recently to say $2 billion in expansion CapEx per year. So, you know, those are all signs of, you know, of how we see this opportunity set. On the MSX project, I'll let Sital talk about that, the open season.

Sital Mody
Sital Mody
President of Natural Gas Pipelines at Kinder Morgan

Yeah, John, this is Sital. So, you know, as you, as we've been talking about the last couple of calls, you know, we've got two open seasons out there. You know, our team, you know, we've been saying for a while that we've got a need for more molecules to move from west to east. So what you have is two open seasons, one with Mississippi Crossing and one with Trident, that basically is getting molecules to where they're needed. Mississippi Crossing is a, you know, can be scaled up, you know, up to two BCF to get to this, to the Southeast markets, obviously, to feed some of the Southeast customers that we're working with on South System 4.

Sital Mody
Sital Mody
President of Natural Gas Pipelines at Kinder Morgan

Trident is a project that gets gas from Katy all the way to the LNG corridor in Port Arthur, and so we're excited about those projects. We're working with our customers. Needless to say, both of them are in kind of a competitive space, so you know, hopefully we'll have more to share on the next call as it pertains to those.

Kim Dang
Kim Dang
CEO at Kinder Morgan

They just gave me the number on the backlog. Third quarter last year was 3.8, so we've gone from 3.8-5.1, so that's a 34% increase in the backlog.

John Mackay
John Mackay
VP of Equity Research at Goldman Sachs

All right. That's great color. Appreciate all that. I think just second question, you know, we're going into guidance two months from now. Obviously, not going to ask you on specific numbers or anything, but if we look at where 2024 has trended versus our initial guidance, big part of that has been commodity softness, we can debate over how much of that is transitory or not. But could you talk about maybe other puts and takes inside the business that are trending, you know, better or slightly softer than expected outside of commodity? And just maybe generally, how some of those can, you know, how they'll trend into 2025?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Sure. So, you know, on the natural gas side, obviously got the commodity impact, and that's impacting gathering volumes. And so we've seen some weakness versus our budget, and you heard Tom address that in his comments on gathering volumes. On the other hand, you know, we have seen huge strength in the transmission assets, and that's on transport contracts, that's on storage, that's on PAL. And so a lot of upside versus our original budget there that's, you know, offsetting the downside, some of the downside that we see on commodity and the G&P volumes. So I think, you know, the question when you start looking into 2025 is gonna be around what we expect G&P volumes to be.

Kim Dang
Kim Dang
CEO at Kinder Morgan

I think it's kind of too early to talk about that. You know, I think the first half of the year, you know, probably looks a lot like 2024. I think as some of these export LNG volumes come on in the back half, whether that's, I think Corpus has got some volumes coming on. I think Golden Pass should at the end of the year, and then I think there's Plaquemines. So I think, you know, with those volumes coming on, you know, that will, that will lead to a stronger, stronger environment to some extent on. A part of that also depends on what kind of winter we have.

Kim Dang
Kim Dang
CEO at Kinder Morgan

But I think, you know, going into 2025, you know, on the other business segments and, say, you know, products and terminals have rate escalators. We've got some upside on Jones Act. Interest rates are obviously gonna be a benefit to us. Expansion projects, you know, getting our RNG facility stabilized, and then, you know, we'll just have to see where G&P comes out and where we come out on commodity prices. And then I think, you know, cash taxes will probably go up a little bit, but we still will not be as overly significant cash taxpayer.

John Mackay
John Mackay
VP of Equity Research at Goldman Sachs

All right. That's fantastic. Appreciate the time.

Operator

The next question in the queue is from Michael Blum with Wells Fargo. Your line is open.

Michael Blum
Michael Blum
Managing Director at Wells Fargo

Thanks. Good afternoon, everybody. Wanted to just stay on the topic of the percolating gas, gas demand, gas projects. Given just the growing potential backlog of projects that you're looking at, where do you see CapEx trending over the next few years? I know you last quarter kind of raised it from $1 billion-$2 billion, up to, you know, ±$2 billion of growth CapEx, but do you see that trending even higher over time? And any idea of where that could go?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Okay. So, Michael, I'd say it could. I'd say at this point, there's no change to our roughly $2 billion per year. As I said, that, you know, two—when we say roughly $2 billion, you know, that can exceed $2 billion. That could be $2 billion-$3 billion or something like that, I think. You know, and, you know, CapEx can be lumpy, depending on the timing of that. So you got to keep that in mind. But it's something that we review every quarter, and that, you know, we reviewed before coming into the call this quarter, and we'll do so in January of next year. So, we try to keep you up to date on that, but no change at this point.

Kim Dang
Kim Dang
CEO at Kinder Morgan

You know, I'd point out that, you know, with the cash flow that we generate, you know, we can fund roughly $2.5 billion per year in CapEx out of our cash flow. And then in addition to that, we've got, you know, some balance sheet capacity, should we need it, to be able to fund projects and then and bring down leverage as they come on. So, you know, I think we're in good shape in terms of being able to fund projects if and if we were lucky enough to take that number higher.

Michael Blum
Michael Blum
Managing Director at Wells Fargo

Got it. That's, that's great color. Thanks. And then my other question was really about expected returns. So obviously, the backlog has lots of different projects, different sizes of type, types of projects. But I was wondering, let's just talk about trend-wise. Are you seeing better returns on this project? It seems like the South System Expansion 4 was a really attractive multiple versus your total backlog. So just wondering if you're seeing that trend overall. Thanks.

Kim Dang
Kim Dang
CEO at Kinder Morgan

I mean, I think the returns that we are getting on these projects are pretty consistent with what we've achieved historically and what we've targeted. So, you know, different projects, you know, come at different returns. You know, depending on how long it takes you to bring a project on, you know, the multiple is likely gonna be better to get to the same return because you've just got that, you know, you've got that CapEx drag on the front end, but no, South System 4 is not substantially different than, you know, the projects that we've done historically.

Michael Blum
Michael Blum
Managing Director at Wells Fargo

Thank you.

Operator

The next question in the queue is from Theresa Chen with Barclays. Your line is open.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Hey, Theresa. Teresa?

Operator

Theresa, are you there? Please check your mute button.

Theresa Chen
Theresa Chen
Senior Analyst for Midstream and Refining Equity Research at Barclays

Can you hear me now?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah.

Operator

We can hear you.

Theresa Chen
Theresa Chen
Senior Analyst for Midstream and Refining Equity Research at Barclays

... Sorry about that. So looking at your Mississippi Crossing project, can you give us some color on the commercial drivers that would allow Kinder to win this project, assuming the binding open season is successful? Do you think this is in part driven by customers' desire to diversify sources of supply beyond the typical Northeast Mid-Atlantic corridor?

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

Theresa, a good question. You know, one, I think as we've been saying before, you know, with the advent of all this LNG coming on in the Gulf Coast, I think the markets are recognizing the need for incremental supply. And this is, you know, not only diversification of supply, but actual access to physical molecules to be able to handle the upcoming growth. And so I think that, you know, reaching back to a point of liquidity where you have access to different basins in addition to the existing basins is kind of the play.

Theresa Chen
Theresa Chen
Senior Analyst for Midstream and Refining Equity Research at Barclays

Got it. And then turning to a different part of your portfolio. With the recent success of one of your competitors in spinning out their liquids business, any thoughts on separating your products business from your natural gas assets to potentially reflect better value in each?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah, I mean, I would say, you know, we, the businesses that we own and operate, we think there are synergies to owning together. We get benefits from owning, you know, natural gas and products pipeline. For example, on the integrity side, you know, our integrity team is one that goes across. You know, on the project management side, we get benefits from that. And so, you know, I think there would be certain dyssynergies if you spun those businesses out. I also don't think that, you know, if you look at a sum of the parts, you know, where we're trading today, if you peel those businesses apart and look at them versus where you look at the company together, there's a significant discount.

Kim Dang
Kim Dang
CEO at Kinder Morgan

And so, you know, there's not a big incentive to incur transaction costs, dyssynergies, probably on the GNA side, and dyssynergies potentially on the debt side. That just depends on where interest rates are at the time you would do a transaction like that, that would make sense right now. You know, it's a very market-dependent transaction, and so you've got to have very strong views about where the companies would trade in the aftermarket that are significantly different from, you know, a sum of the parts in order to justify taking on that kind of risk of breaking up a company.

Theresa Chen
Theresa Chen
Senior Analyst for Midstream and Refining Equity Research at Barclays

Thank you very much.

Operator

Next question is from Zach Van Everen with TPH. Your line is open.

Zack Van Everen
Director of Equity Research Division at TPH

Hey, guys. Thanks for taking my question. Maybe to start, could you guys touch on the recent decision with the U.S. courts on your Cumberland Project and kind of what the process is there going forward?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah, sure. And so, you know, as you know, the Sixth Circuit stayed our Army Corps, and our Tennessee air permits, or water,

Kim Dang
Kim Dang
CEO at Kinder Morgan

... water permits. You know, what that effectively does is it prevents us from starting construction on that project. We believe that decision is wrong. We believe the analysis is flawed on multiple levels, including the standard that they applied for the stay. You know, that's a project where we are delivering natural gas to a natural gas power plant that is converting from coal. And so, you know, here, the FERC found that that project would result in a reduction of greenhouse gas emissions, so it would be good from a greenhouse gas perspective. You know, over the last ten years, you know, our permits, whether that's federal, state, local, you know, have been challenged by anti-fossil fuel opponents, you know, regardless of the benefits to society.

Kim Dang
Kim Dang
CEO at Kinder Morgan

We have been very successful in winning those court challenges. You know, recently on the D.C. Court of Appeals, you know, they upheld our FERC permits on two separate projects. So we were also successful in other courts on state and local permits related to those projects. You know, this isn't something that is new for us, but we're working with the impacted agencies, the Army Corps and TDEC, to determine next steps, and you know, I think both of those agencies are going to vigorously defend those permits.

Zack Van Everen
Director of Equity Research Division at TPH

Perfect. That makes sense. And then maybe one on the FID on Gulf Coast Express. You know, I think when looking back to Permian Highway, that took about a year. Is that a similar timeline you guys are looking at for this expansion?

Tom Martin
Tom Martin
President at Kinder Morgan

Permian Highway took about nineteen months. You know, here we're probably, you know, kind of conservatively saying twenty-two months, given all the, you know, there's quite a bit of demand on compression and some of the electrical components. That being said, you know, we're targeting a mid-2026 in-service date. So, you know, not quite the nineteen months on PHP, but we don't see it being that far out of the realm.

Zack Van Everen
Director of Equity Research Division at TPH

Got it. Makes sense. Appreciate the time, guys.

Operator

Next question is from Jean Ann Salisbury with Bank of America. Your line is open.

Jean Ann Salisbury
Jean Ann Salisbury
Managing Director at Bank of America

Hi. Between the Gulf Coast expansion and Blackcomb, there's a lot of gas heading to the Agua Dulce area. Is there a risk that there won't be enough demand in the area in 2026, especially if LNG projects get delayed? And how do you see the GCX expansion as positioned for that risk?

Kim Dang
Kim Dang
CEO at Kinder Morgan

... So good, very good question. You know, I think, look, if there's any delay to the demand centers, you know, particularly the LNG demand centers, could there be some pricing exposure? Yes. That being said, for us, you know, part of the our discussion points have been, you know, we've got some downstream optionality on our networks for our customers. And so there is so that embedded optionality, at the end of the day, you know, when you have that kind of variability, there's going to be some volatility, which, you know, which storage assets come into play. And really, that's where I think that becomes increasingly important as we move towards that timeframe. It's a possibility, but not a probability. We don't know yet.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

From our standpoint, we have long-term contracts with shippers.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah. So we've got long-term contracts with the shippers. I'll also point out that, you know, it's a potential for us to profit on our Texas intrastate business, you know, where we do buy and sell some gas, and we try to back-to-back those, but sometimes we are in the daily markets. And so to the extent that that gas gets hit at Agua Dulce, and we've got a capacity on our pipeline, you know, we can buy effectively cheap gas, and so that'll be an opportunity for us. I think the other thing on that is, we do have a project that, you know, we've been working on to potentially expand, you know, our pipeline systems from Agua Dulce up into Katy.

Kim Dang
Kim Dang
CEO at Kinder Morgan

And so, you know, if you know, that could create an opportunity for that project, just depending on how long that dynamic was anticipated to persist.

Jean Ann Salisbury
Jean Ann Salisbury
Managing Director at Bank of America

That makes sense. Thank you. Then, at your Investor Day, you kind of mentioned that you have 200 BCF of market rate storage. Bringing that up to current market rates is going to be kind of a tailwind. Is that still a tailwind that you see over the next couple of years? Is that mainly still below kind of current rates, if that makes sense?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah. I mean, it's about 25% of our storage is market-based rates. Some of that we have rolled, and some of it we still have to roll. But in terms of the strength of the storage market, you know, the strength of the storage market is continuing, and rates, I think, are continuing to get a little bit stronger. You know, on Monday, we talked about a three-year deal that we'd done, that was a high watermark for us on the storage side. That was in five-turn service, so I mean, very valuable storage, but we did hit a high watermark.

Kim Dang
Kim Dang
CEO at Kinder Morgan

So I think, you know, that's still going to be a tailwind, but, you know, those contracts probably roll over a three-year period, roughly, so you probably roll a third of those, a year.

Jean Ann Salisbury
Jean Ann Salisbury
Managing Director at Bank of America

Great. That's helpful. That's all for me. Thanks a lot.

Operator

Next question is from Neil Dingman with Truist Securities. Your line is open.

Neil Dingman
Neil Dingman
Managing Director of Energy Research at Truist Securities

Good afternoon, all. First, my first question, just more general on backlog. Kim, I'm wondering: Is it fair to assume that, you know, we should think of your backlog maybe staying around that $5 billion, given, you know, number one, seems like you have a lot of opportunities you discussed, but you also have, I know, a number of projects that should come onto service in the coming quarters, and just wonder how you would expect us to think about this?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah. We haven't tried to do a roll forward of our backlog yet, Neil. So I can't really tell you exactly directionally where we're going. You know, as I said, it's increased from 3.8, you know, a year ago. We do have projects rolling off, but I think, you know, there's the potential to add some significant projects in addition to, I think, singles and doubles. You know, to the extent that we add those really significant projects, you know, I think there's potential that that backlog grows.

Neil Dingman
Neil Dingman
Managing Director of Energy Research at Truist Securities

That's great to hear. And then just secondly, I know a bit smaller, just anything you could add on the CO2 portfolio. Specifically, I know, I think, last quarter you mentioned just likely no material change in capital spend there. I'm just wondering, will this continue to be the case? I know you've got, what-- given the development of SACROC and North Elroy, different things, you know, how should we think about the- that portfolio?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah, I think you, you know, Tom mentioned in his comments that we just recently, well, this quarter, yes, to this morning, our board approved about $150 million projects in CO2. And those are really new CO2 floods. And, you know, on peak production, that's going to get us an incremental 5,000 barrels a day, you know, which is a pretty significant amount, you know, on, you know, as a percentage basis of the existing production. So, Anthony?

Anthony Ashley
Anthony Ashley
President of CO2 and Energy Transition Ventures at Kinder Morgan

Yeah. On an annual basis, we're spending probably $200 million a year on expansion, so I think that just rolls into that program. So I wouldn't expect a material increase, at least in the near term.

Neil Dingman
Neil Dingman
Managing Director of Energy Research at Truist Securities

Very good. Thank you both for the details.

Operator

Next question in the queue is from Jeremy Tonet with JPMorgan. Your line is open.

Jeremy Tonet
Jeremy Tonet
Research Analyst and Managing Director at JPMorgan

Hi, good afternoon.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Hey, Jeremy.

Jeremy Tonet
Jeremy Tonet
Research Analyst and Managing Director at JPMorgan

Hey, also want to give a belated happy birthday to David there.

David Michels
David Michels
VP and CFO at Kinder Morgan

Thank you, Jeremy.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Do you know how old he is?

Jeremy Tonet
Jeremy Tonet
Research Analyst and Managing Director at JPMorgan

I don't think I'm allowed to ask that, but just wanted to kind of pick up on a couple pieces that were touched on a bit during the call. You know, Kim, I recognize this as kind of an impossible question, but just at a high level, when we're thinking about operating leverage for Kinder, you know, there's weight and capacity on the gathering side, there's you know, weight and capacity on the pipe side. And just you know, want to get a sense for, I guess, capital-light growth there. If the G&P you know, really takes up, if there's a call on gas, higher gas prices, if the peakers are really pulling, you know, because they have to run more, given high power prices, how does that, I guess, you know... impact KMI?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Mm-hmm. So I think there is, you know, capacity on, you know, on some of the gathering, especially in the Eagle Ford. We'd have to add some processing in the Eagle Ford, but from a pipe standpoint, you've got plenty in the Eagle Ford. In the Haynesville, we've got a big backbone, but, you know, we'll need to add some laterals, potentially some treating, depending on, you know, what's going on there. I think lateral is probably required in the back end, but again, pretty efficient expansions on the gathering and processing side. You know, on the, you know, on the transmission pipes, those are running, you know, pretty full, as you've seen from some of the utilization that we presented at our conference. And so, you know, there, I think more of the upside is gonna come as contracts roll.

Kim Dang
Kim Dang
CEO at Kinder Morgan

So it doesn't necessarily, and then as we can provide some ancillary services around, you know, volatility events. I think is where you'd see some tailwinds on those pipes that run at pretty good utilization.

Jeremy Tonet
Jeremy Tonet
Research Analyst and Managing Director at JPMorgan

Got it. That's helpful there, and then, you know, just wanted to kind of touch on a little bit more as it relates to the power demand, you know, large customers as well as, you know, data centers, potentially. How far upstream could you guys see Kinder going? You know, could Kinder provide behind-the-meter gas solutions, be it providing the gas, or if there was a contract structure that was attractive, even, you know, providing the power itself with the gas generation? Just wondering how you think about the opportunity set here.

Kim Dang
Kim Dang
CEO at Kinder Morgan

Yeah, sure. I mean, you know, providing gas directly to a power plant is, you know, we can do that, whether it's behind the meter or, you know, in front of the meter. I mean, you're asking, is it gonna be part of the transmission grid or not? I mean, that doesn't really impact us, so we can provide the gas in either scenario on that. You know, we've talked about from time to time, you know, could you have put a power plant next to one of our storage facilities? And, you know, that would give, you know, that power plant, you know, very high reliability. It would also give great reliability potentially to a data center that was located near.

Kim Dang
Kim Dang
CEO at Kinder Morgan

You know, we don't have any concrete really plans on that at this point, but it is something that we are looking at.

Jeremy Tonet
Jeremy Tonet
Research Analyst and Managing Director at JPMorgan

Got it. That's helpful. Thank you for that.

Operator

The next question in the queue is from Keith Stanley with Wolfe Research. Your line is open.

Keith Stanley
Keith Stanley
Director at Wolfe Research

Hi, thank you. Just two clarification questions. So, the first one, I think you said you could fund $2.5 billion a year of growth CapEx out of cash flow. Would you be comfortable even going higher than $2.5 billion a year on a recurring basis? Or do you view $2.5 billion as kind of a cap within your financial framework?

Kim Dang
Kim Dang
CEO at Kinder Morgan

Oh, as I said, you know, right now we're at 4.1x debt to EBITDA. We expect to, in the year, around 4x debt to EBITDA. You know, the high end of our range on debt to EBITDA is 4.5x. You know, every point one is, you know, roughly $700 million-ish. And so, I mean, you could, we could debt fund, if you will, some incremental CapEx, as long as we are sure that, you know, over time, you know, based on the cash flow that these projects would bring on, and I think, you know, based on the returns that we target, that would occur, you know, that debt to EBITDA would come back down over time. And so, you know, that's, that's something that we can do.

Kim Dang
Kim Dang
CEO at Kinder Morgan

The other thing is, I mean, our view is, when we, you know, good return projects, we can find capital for. And so if there were some really, really large projects, you know, we could also get partners on those. So I don't, you know, I don't see a problem, being able to fund good projects with good returns, whether it's 100% on us or, partnering with, you know, private equity or, or somebody else.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

We think we can maintain a strong balance sheet and still accommodate our needs for CapEx.

Keith Stanley
Keith Stanley
Director at Wolfe Research

Thanks. That makes sense. The second one, just on the I wanted to follow up on the courts question. I mean, some of your peers have been affected a little more, but do you see more risk generally with court reviews on projects post the Chevron decision? And are there different things you can do on permitting strategy, you know, timing of when you deploy capital, thinking about return requirements to deal with it if the courts are becoming a little more problematic on new infrastructure?

Kim Dang
Kim Dang
CEO at Kinder Morgan

What I would say with respect to the Chevron Doctrine and this decision is I don't think the Chevron Doctrine played, you know, any part in the decision we got on Cumberland. You know, I think that this is something that we've been seeing. I mean, even if you go back to PHP, I think we had five or six separate matters that got challenged, as you know, that we were going through PHP, and we had, like, 14 different hearings that we were successful on. So, I think this is something that we have been seeing for a while. Yes, there are things that we can do, you know, to try to make the situation better. I think, you know, as we work through permits, it's not sufficient just to get a permit.

Kim Dang
Kim Dang
CEO at Kinder Morgan

We have to make sure that, you know, we're covering all the bases and doing all the work necessary to try to make these, the permits that we receive, defensible in court, and, you know, I think that, you know, I don't see it right now being more difficult than what we've seen in the past. I think people should expect that, you know, that we're gonna get challenged, and that we're gonna work that into our strategy. We're gonna work that into how we deploy capital, and we're gonna figure out how to overcome that as we do these projects, just as we have for the last 10 years.

Keith Stanley
Keith Stanley
Director at Wolfe Research

Thank you.

Operator

I'm showing no further questions at this time.

Rich Kinder
Rich Kinder
Executive Chairman at Kinder Morgan

Okay. Well, thank you all for joining us this afternoon. Have a good evening.

Operator

This concludes today's call. Thank you for your participation. You may disconnect at this time.

Executives
    • Kim Dang
      Kim Dang
      CEO
    • Anthony Ashley
      Anthony Ashley
      President of CO2 and Energy Transition Ventures
    • David Michels
      David Michels
      VP and CFO
    • Rich Kinder
      Rich Kinder
      Executive Chairman
    • Tom Martin
      Tom Martin
      President
    • Sital Mody
      Sital Mody
      President of Natural Gas Pipelines
Analysts
    • Michael Blum
      Managing Director at Wells Fargo
    • Zack Van Everen
      Director of Equity Research Division at TPH
    • Keith Stanley
      Director at Wolfe Research
    • Jeremy Tonet
      Research Analyst and Managing Director at JPMorgan
    • John Mackay
      VP of Equity Research at Goldman Sachs
    • Jean Ann Salisbury
      Managing Director at Bank of America
    • Theresa Chen
      Senior Analyst for Midstream and Refining Equity Research at Barclays
    • Neil Dingman
      Managing Director of Energy Research at Truist Securities
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