Good morning, everyone. Thank you so much for joining us. My name is Theresa Chen, and I am 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. It is nice to be here.
Thank you very much for being here. There is quite a bit happening across your footprint. We are 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. Let me start by saying that the natural gas segment is about 2/3 of our business. It is the area where we expect the most growth. As you said, on our second quarter call, we talked about at least $1.4 billion of projects. Just to give a little background for people. At the end of the first quarter, our backlog was about $10.1 billion. Then it reduced in the second quarter to about $9.6 billion as a result of projects that we put in service. For the balance of the year, so the back half of the year, we expect to put another $1 billion of projects in service. 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.
Expecting the backlog to be $10 billion or likely more by the end of the year. 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 board-approved projects. 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. Generally, those types of projects have higher returns. These are projects that we are moving forward with. 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. It's really driven by the growth in the natural gas market. Wood Mackenzie shows that the natural gas market is going to grow from almost 115 BCF a day in 2025 to 160 BCF by 2035. It's like 46 BCF a day of growth in the natural gas market, primarily driven by export LNG and power. Export LNG number's like 23 BCF and the power number's like 17 BCF. 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.
The growth combined with the asset footprint that we have, the 80,000 mi 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 two things combined, 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'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, bona fide, carved in stone, and that word means different things across your competitors.
Right.
So as these late-stage natural gas opportunities materialize and move into the sanction of backlog, looking at that sanction set of projects in general, how should we think about the impact to your medium-term earnings growth trajectory?
Sure. What we do for people is on the backlog, we give them a multiple, right? 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, 8.5% of the 9.6% is associated with those type of projects, and we have a 5.6% times multiple on those. The 1.2% of other projects is gathering and processing and also the oil and gas production in our CO2 business. 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. You get more of your return up front. So actually, the upfront multiple on those projects is even better.
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. The average in-service on our backlog is really the first half of 2028. Those projects will largely contribute growth, some in 2027, but a lot more in 2028 and in 2029. As we add projects, that will extend out that growth because as you add projects, a lot of them will be FERC-regulated. They'll take a couple of years to get permitted or two to three years probably to get permitted and come online. It'll extend out. The projects that are in the at least $1.4 billion are going to be things that come online in service in the end of 2029 and into 2030. 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 projects to fruition and when they will actually contribute earnings.
Right.
Certainly. Now, understanding that the vast majority of your business is insulated from direct commodity price exposure and largely indirect as well, given the volumetric 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 a backdrop of sustained commodity price volatility. Curious to hear from a volumetric perspective, where do you see the most near-term growth potential across your diversified footprint given this commodity price outlook?
Sure. If you look at our gathering assets, our gathering and processing business is about 9% of Kinder Morgan overall. As you said, not a huge driver of growth. Natural gas is like 90% of that. So 8% of the 9% is all in natural gas, and it's largely in three basins. It's in the Haynesville, it's in the Eagle Ford, and it's in the Bakken are the three primary basins where we have the gathering. Certainly that is going to be a tailwind for us. If you, again, go back to Wood Mackenzie and the 46 BCF a day of demand, where is that supply coming from? That supply is projected to come from three primary basins. It's coming from the 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%. Those are the three primary. But then they also have the Eagle Ford growing by 4% or 5%, I think. 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 growth numbers that Wood Mackenzie is projecting for that to continue over the near term, medium term. The Eagle Ford will benefit from that growth as well. 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%, the 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.
Yeah.
Turning to the unsanctioned backlog.
Yeah.
I want to ask you about TGP.
Okay. Yeah.
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 non-binding open season in August. Can you elaborate on the strategic benefits in general of this project? How observed customer demand, how did that come about compared to your initial expectations given the competitive landscape?
Sure. What Theresa Chen 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 near Nashville, is where the delivery point is on that. It would be a little over 500 million cubic feet a day is what was open seasoned. It is not binding. 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.
I think ultimately most of that gas is going to need to come south. Expanding north is difficult. There are some small incremental expansions here and there to the north, but really to get the level of supply out that Wood Mackenzie suggests, you are going to need expansions coming to the south to get that 13 BCF a day out of the Marcellus Utica. This is a project that would start that, and we get 500 a day.
It really goes into Tennessee, so it is intended to serve power plants that are in Tennessee, Kentucky, West Virginia, largely, potentially Ohio. That is really the driver of that demand. Right now what we are doing is we are following up with all the parties that bid in the non-binding open season, to determine when is there need, where exactly do they need the deliveries, et cetera. 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. Understanding that the corridor to and at Tennessee, incredibly important to solidify that interest into binding commitments. I know your ambitions lie beyond Tennessee as well on TGP. If this expansion, as 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 SSE 5 on SNG? 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 in all of these as well.
Okay. Yeah, sure. I think, the Marcellus Utica needs outlets for its gas
Yeah
in order to grow. The Southeast is going to have a lot of incremental demand. A lot of that's going to be driven largely by power. You can get those molecules also potentially into the export LNG. So meeting really the two big drivers of demand. 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. One way to do that would be to continue the expansion.
You can continue south on TGP from the Tennessee area, down south where TGP actually connects with one of our pipeline that we'll start building this fall called Mississippi Crossing. You can take it south. It requires expansion of TGP. It would definitely require some line looping potentially. Then you could move across MSX. MSX has a very small amount of capacity left on the initial build. You can also do some compression expansions, and then ultimately you could do some looping. MSX feeds into South System 5. Then you can backflow the molecules as well to get into export LNG. There's a lot of different ways to feed that demand, but that's one of them. It's a great opportunity for us in the Southeast, for sure.
Got it. Then on the Texas side of things, your transmission footprint there. The initial phase of Trident is set to enter service early next year, followed by phase ll in the fourth quarter of 2028. Given your comments earlier about the emergent call on U.S. LNG, are you observing incremental demand for a possible phase lll of Trident beyond the 2 BCF per day of sanctioned capacity at this point?
Right. 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 the 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. The first phase will be complete in 2027. Then the second phase will be done in late 2028.
There's a small amount of incremental capacity left on the initial phase l, phase ll project, but it's relatively small. Beyond that, there's expansion capabilities. Depending on how much you want to add, depends on whether it's just compression or whether you need compression and piping. I think we can serve both the Texas LNG demand, and also, potential demand over in the Southwest Louisiana. Longer term, that is a nice opportunity for us as well.
Okay, great. In the Permian, when we look about other conduits of expansion, the introduction of incremental residue capacity has driven Waha basis narrower and faster than previously expected, with more to come still.
Right.
How has this impacted your expectations for the timing of the next wave of Permian residue egress, given how quickly this first phase has built up? Would you touch on maybe your outlook on a previously discussed small scale westward expansion of EPNG?
Yeah. I think at this point, based on what has been announced, there is enough egress capacity from the Permian to the Gulf Coast for the foreseeable future. I think what we see right now, what we are talking to a lot of customers about is demand in and around the Permian. I use around broadly because, a great example of that would be the non-binding open season that we just held on NGPL for a project called Permian Link, which would take Permian molecules up into the Texas Panhandle.
That is largely driven by power demand. Had huge interest in the non-binding open season that we held. Now, again, like on TGP , we are following up with customers, trying to nail down the timing of that demand, and then try to sanction a project from that. But those are the type of opportunities that we are seeing, is power plants, data centers locating in and around that gas supply, and then being able to build off of our existing pipeline system to take that gas to those demand centers.
Understood. We've somehow gone 20 minutes without discussing Western Gateway. We're going to move to the product side of things. This was recently FIDed with your JV partners, Phillips 66 and DINO in August, after months of negotiations between partners and customers, I'm sure. Can you talk about the strategic merits of this finalized JV structure and what it means for Kinder?
Sure. We're a 35% interest in the joint venture with HF Sinclair and with P66. It's a great partnership because they're very strategic partners in that they are mid-continent refiners that want to take barrels to California. The premise of this project is you have California refineries shutting down. California refineries serve not only the California market, but they also serve the Phoenix market, the Las Vegas market, and the Reno market. What's happened as these refiners have shut down is California's having to bring more barrels in over the water. With the international situation, that is becoming more and more expensive. The idea behind this is to bring mid-continent supply to Arizona, to Phoenix specifically, and then on to California.
The JV is building a new pipeline from the Borger Refinery in the panhandle of Texas to Phoenix. Then we have an existing line that goes from California to Phoenix to feed Phoenix from California. We're going to turn that pipeline around. The new pipe can not only feed Phoenix, but it can also move barrels out to the west to solve California's supply issue. I think it's a great project. It's underpinned by a number of different customers, but some very strategic partners and very strategic customers. On this, we get our 35% interest by contributing assets. Those assets have been valued at roughly $1.5 billion. Then we've got $250 million in cash equity that we are contributing, and we expect to earn incremental return on that $250 million above the existing assets. So, it's a great partnership for us.
Sounds like, based on the project as it's contemplated, there could be expansion capability down the line.
Yeah
if demand warrants.
Sure. I think the capacity on that pipe is about 230 a day. But we have the ability to get up over, I think, 320 a day. So there is expansion capability.
Wonderful. On your CO2 footprint, really jumping around across your segments. Okay. Commodity price tailwinds-
Yeah
have supported earnings upside relative to initial expectations, at least. As we look towards 2027, understanding that you will be giving guidance in due time, how do you expect volumes to trend relative to this year? And to what extent has Kinder been able to hedge those 2020 volumetric expectations at currently elevated prices?
Okay. Again, just a little context for people. CO2 segment is about 7% of Kinder Morgan overall. The oil and gas segment, which is where we produce oil and gas versus the CO2 supply business. The oil and gas piece of the CO2 business is about 4% of Kinder Morgan overall. Generally, we are hedging our oil exposure. Going into a year, we are typically 90% hedged, roughly, on any given year. Right now for 2026, we are about 90% hedged. We do get a little bit of upside from commodity prices. But as you can tell from the percentages, it is small, it is on the margin. Now, when crude is up $20 a barrel, that is some-
Nice dollars.
We are very thankful for it. Also, our CO2 volumes, our oil and gas volumes are doing very well this year, outperforming our budget. So that segment is doing well. We have put on some additional hedges for 2027 during this time. Right now, we are about 75% hedged for 2027 at a mid-60s price range. But we will continue to lay on additional hedges as we get closer to 2027. Right now, I think the forward curve for 2027 is in around the mid-70s.
Very good. Yeah, the backwardation, it is what it is.
Right.
But you have to manage through on a ratable basis. Totally understandable. Then finally, with respect to capital allocation, you have an incredible amount of growth opportunities ahead of you, and we can only see the organic piece of it that you have spoken to, right?
Right.
How do you plan to balance organic growth opportunities with potential inorganic opportunities as well? Are there specific areas of your portfolio that you see gaps? You have been no stranger on the inorganic side, most recently with the Monument acquisition. I would love to hear about how comprehensive you want your portfolio to be over time and where those pockets are.
Okay. Let me say, first is, we can fund over $3 billion of annual expansion CapEx with cash flow. Then added to that, we have got a fair amount of balance sheet capacity. So right now, our balance sheet is about 3.6 times debt to EBITDA, and our target range on our balance sheet is 3.5 - 4.5 times. So we are at the very low end of the range. So every 0.1 turn on the balance sheet is about $800 million of capacity if you are talking about an expansion CapEx project that has no cash flow coming with it for a couple of years. Right? So if you say, "Okay, well, we are going to go from 3.6 - 4," that is an incremental $3.2 billion of capacity.
Having that flexibility has been great because as we've seen these bolt-on acquisitions come up, and we've seen roughly one a year over the past couple of years, it's been easy just to fold those in using our balance sheet, not having no need to raise any equity or anything like that. The other thing is acquisitions are coming with cash flow, so when you talk about balance sheet use, a billion-dollar acquisition only uses 0.05 times leverage if you do it at reasonable multiples. Right? You're not using a lot of balance sheet capacity to be able to go out and do these bolt-on acquisitions that we've done.
We've been very successful, and where we're most successful is where we find these bolt-ons that really fit into our existing system. This year we did Monument, that folds into the Texas intrastate system. I think the year before we did a Bakken acquisition that folded into that position. The year before that, we did a different Texas acquisition. We've had a lot of success at being able to do those and fully fund our expansion CapEx. I think our balance sheet position gives us a lot of flexibility to be able to execute on opportunities when we see them.
Yeah. Certainly not financially constrained in any way.
Right
From your internal balance sheet capabilities, as well as just the plethora of external funding options that we've observed across some of your competitors.
Oh, sure.
as well.
Sure.
Look forward to the next announcements on organic and inorganic side.
Hey, I want to come back really quick.
Yeah.
Just, I talked about the opportunity in the Southeast, but just to give people more of a feel for that, if you look at the Georgia Power large economic development report, they show 75 GW of potential power to be added between now and mid-2035. All that won't be gas, but if you just translate that, I have to translate gigawatts into BCF for me to be able to understand. I mean, horseshoes and hand grenades, that's like 15 BCF a day. I just divide by five as a rough justice. Again, that won't all be gas and maybe all that doesn't come on, but that's just a huge opportunity, and that speaks to the opportunity to take those molecules out of the Marcellus and move them down into the Southeast markets, because that's just one utility in one state, but that's endemic of what we see going on.
The demand is extensive, to your point.
Right.
Very good. Thank you so much, Kim.
Thank you, Theresa.