Okay, great. We're continuing our midstream fireside chats here. Very happy to have David Michels, CFO of Kinder Morgan, joining us. David, why don't you give some opening remarks on the company, please?
Sure. First, thanks for having us here, Keith. Appreciate it. A good set of meetings so far. Looking forward to the rest of the day. As we'll talk about more during this meeting, this is a pretty opportunity-rich environment for midstream companies. Natural gas infrastructure development opportunities are as strong as we've seen in decades. It's creating a lot of interesting opportunities for us for additional growth. Our base business remains very solid. We'll talk about the full utilization of networks across the space, which has led to the ability for us all to capture additional value when we see periods of time of disruptions, weather events. Then on top of that, these new opportunities to satisfy growth in the LNG space, growth in the power generation space, is allowing us to add projects and add additional EBITDA on top of our base business.
It's a great place to be right now, and it's very exciting. We're pretty enthusiastic about the outlook for the company and looking forward to the conversation to get into that a little bit more.
Great. So maybe we could start high level. I think about a year ago now, you put out a $10 billion shadow backlog. You talked to $3 billion+ per year of CapEx. I think you've sanctioned about $2 billion of projects since that time. How are you feeling on executing that shadow backlog and the ability to get to a $3 billion + CapEx type profile over the next five years or so?
First, let me just remind everybody. Our project backlog is, because everybody defines it a little bit differently, our project backlogs are projects that have been sanctioned by the board. They have binding contractual commitments with offtakers for, in most cases, north of 90% of the capacity for the infrastructure that we are building. They are real projects, and in most cases, they are under construction. We are highly confident that those are going to be brought to market and add to the EBITDA of our business. The projects that are outside of that in this shadow backlog have not yet been sanctioned and are not as certain. But in this current environment, we are continuing to see very strong interest in new infrastructure development.
We feel pretty confident given where we are in the negotiations and how the shipper conversations have progressed, that we will continue to see more projects being sanctioned to at least replenish the projects that are being put into service in the coming quarters. We talked about in the second quarter that $1 billion+ would be sanctioned between, at that point was July, until through the end of the year. I think we are pretty confident we are going to see that happen, and maybe even some more.
What gives you confidence on the $1 billion +? You have contracts in hand that are just getting finalized, or how do you have visibility you have over $1 billion of projects to move forward before year-end?
We are working on multiple projects at the same time. Some of those are smaller and do not get the public attention. But those are likely to contribute to some degree to the $1 billion +. Then we have a handful of larger projects, some that have gotten some publicity, that are in various stages of development, but a couple that have progressed to a point where it feels more likely than not that we will see one or two of those get sanctioned between now and the end of the year.
Some of your projects obviously are feeding a lot of utility demand centers, and a lot of the utility demand growth is driven by data center build-out. Are you seeing any pause in your conversations with utilities on what their gas needs might be, just given some of the uncertainty on the data center development and the ultimate power demand growth?
Not really. It's certainly been a topic of conversation with us and the shippers, but the order of magnitude of the demand that we're seeing in certain areas is so large that even if there is a little bit of pause or postponement in some of the development of data centers, the underlying power generation growth is still there, and these projects are still going to be needed at some point. We've had some conversations, but they really haven't paused the development of the specific contractual arrangements that we're talking about.
Okay. Do you see a scenario, I guess there is a scenario, though, where the utilities. The utilities are going to procure the gas for their power needs. You're contracted on that, so from your end, that's done, and then if the data centers are slower to develop, from your contractual perspective, you're locked in anyway on your investment.
That's right. That's how we go about trying to protect ourselves in these situations. The utilities have, and again, this is speaking to the point that I just made, have a big enough demand pull on their grid that even if you have one or two of these data center development facilities that get postponed or don't get developed at all, we're seeing not just data center development, but you're also seeing population migration, electrification of certain industries, industrial demand that are all contributing to additional power generation needs in these utilities' grid. So I think that's helped facilitate these conversations, even though in some states there have been some pauses in data center development or some conversation about pausing data center development.
Maybe we could go to some exciting news two weeks ago. You put out this open season with Southern Company on the Southeast Connector for the SNG pipeline. You only put it out two weeks ago, and it already ends next week, I think. You have one customer in place based on that document. Can you talk to the strategic drivers of this project? In particular, you are already expanding SNG. I do not even know if you have started construction on SSE 4, but that comes on in late 2028 and late 2029.
Right.
Now you are doing an open season for yet another expansion of the SNG system. So talk to some of the drivers for that project and what you are seeing in the Southeast.
Right. So when you look at some of the more major utilities in the Southeastern states, Southern Company with Georgia Power and others, Dominion, Duke, Florida Power & Light, TVA. If you look at their large load connection requests, it combines to north of 200 GW across all of those utilities. That is 40 BCF a day if it was all gas and all got developed. If you look at those that are in advanced stages or in executed contractual positions, that is north of 50 GW a day. So again, a very large amount of power generation growth in those Southeastern states.
So yes, we are already building South System 4. It is well underway. It is currently on budget and on schedule. We have not actually started construction on it yet, but we are in really good shape. We have got our permit and are working on the right of way, securing right of way right now.
But the utilities are seeing so much additional power generation demand that we are already working on ways to solve the next wave, and that is what this connector project would help achieve. It is just one part of the puzzle, right? It is just one piece of the puzzle. We are going to need connections north of it and potentially south of it, and we will see how that grows. But we are pretty excited about this. The open season is going well. You are right, it is a relatively short open season, closes October 7th. So we will have a lot more information to talk about on our earnings call, but it is going well so far.
Okay, you could be prepared to give an update on this by the earnings call based on the open season results?
We'll have some more detail to provide at that point. Do not know exactly what that's going to look like, but we'll definitely have some more detail on it.
I guess if the utilities are really going to develop, you said advanced stages is over 50 GW.
That's right.
It's not all gas, but if that was all gas, you're talking 8 BCF a day or something like that.
That's right.
Of actual gas demand in the Southeast.
Correct.
Okay. That's a big amount of gas.
Right.
Okay, it sounds like Southeast Connector is from a customer perspective because it's the SNG system, you would be targeting multiple utilities as part of this project that you could serve their needs for? It wouldn't just be one utility?
Yeah, without getting any detail, absolutely. We'd be looking for multiple counterparties, and utilities would be the preferred way for us to play it.
Any sense timeline-wise on how long a process like this takes to get to a final investment decision from where we are today with the open season?
No, every project is different. Every project has its own considerations and potentials for delay. Really don't have anything to add on that front. I know that's totally unsatisfactory. Sorry, Keith.
Any questions from the audience on Southeast Connector? Please.
What is your threshold for that 50 GW to say it is advanced stage? What is the threshold for advanced stage?
That is really just reacting to what the utilities have put out in their resource planning. Everybody defines it a little bit differently. TVA's advanced planning may be different than a Southern's, but we try to bucket into the very likely, it seemed like, and that is what that 50 GW appears to be, is likely development.
Any others? Please.
On the pipeline with Southern , I guess it is this one. Is this it? Once you do this investment to it, is it full capacity, or are there other additional expansion opportunities?
Great question. I think there are additional expansion opportunities. We are building South System 4 right now. There was a 1, 2, 3. We are on 4. We have talked about a 5. This connector project may feed some of the expansion need in that area. But yes, I do not think that SNG itself is done with its growth. We have got a lot of growth coming in that corridor right now, so maybe for right now it is satisfied.
Okay. Then for funding it, would you consider that new insurance capital structure? What is the pipeline model?
For the way that Kinder Morgan is positioned, we have got enough cash flow from operations where we would prefer to fund our capital through our cash flow first. We have some spare capacity on our balance sheet, so we would likely next look to that. Because we have so many projects that we are building, our leverage is likely to decrease once we get a number of these projects online. We think we are going to have spare capacity in the next few years. So between now and then, we would prefer to continue to just fund internally. To the extent that we are funding projects at a JV level, like at SNG or NGPL, we would prefer to just provide our equity contributions into those JV facilities using that cash flow and spare capacity in our balance sheet.
To speak to the size of what that looks like, we can fund about $3 billion-$3.5 billion a year of growth capital investments from our cash flow from operations. On our balance sheet, we are currently at 3.6 x debt to EBITDA. Our long-term leverage target is a large range, but it is a range between 3.5x and 4.5 x. The midpoint is 4x, and I think if we were to use capacity up to 4x, that would provide another $3 billion-$3.5 billion worth of capacity. In any individual year, that could be $6 billion+ , $6 billion-$7 billion of total capacity for growth projects. I do not think we are going to need any external capital.
If there was an acquisition or something that came at the same time as some of the heavy funding years for some of this growth capital, that might put us in the position where it might make sense for us to do something like that.
What about on that specific pipeline, Southern? Obviously pipeline is not their core business, and obviously they have a lot of growth ahead of themselves. If they were to consider divesting the stake in that pipe, do you guys have a right of first refusal on that, or how does that work?
I do not know exactly what our right is in our JV agreement. If they were interested in divesting that, we would be very interested in talking with them about it. It would just depend at that point on a price.
Okay.
Yeah.
Thank you.
I will say this right now. I don't think Southern Company is interested in divesting their stake in SNG. I think it's a very valuable piece of infrastructure, and they recognize that.
You guys have an excellent balance sheet, and the projects are great. I'm curious with the movement in long-term rates being as violent as they have been, you are making long-term investments in underwriting cases and the rates moving and spreads moving in general. Does that change? Do you guys start to bake in any of that in your underwriting or your necessary returns, or how do you think about that?
Yes. Every year we look at our cost of capital, and as needed, we'll update our return requirements to reflect the appropriate cushion between our cost of capital and the required return. It hasn't moved enough yet to force us to adjust our return requirements, and so currently our return requirements are pretty consistent with where we've been. We have seen the cost of debt come up, but we've seen our cost of equity offset that to some degree. On our overall weighted average cost of capital, we're in pretty consistent shape with where we've been. If interest rates continue on the trajectory that they've been on, then that might change things, but we have a very large cushion between where we're requiring our returns to come in and where our cost of capital is.
That also gives us a fair amount of cushion before we actually have to formally adjust where the return comes out.
Just a quick question on the petroleum product pipeline business. Obviously, with diesel having gone through the roof, and additionally Teslas are sold out. There is clearly going to be some innovation and substitution moving around, I think, in the end markets. Certainly, more outside the U.S., potentially in the U.S., but it is still coming to the U.S. How do you guys view the volatility side of the end market, which you do not have control over, but which could have blowback into the long tail of intrinsic value in those kinds of assets as you think about energy transition?
Well, we think our main business is natural gas and transporting and storing natural gas. We think that is the hydrocarbon, the fossil fuel that has the longest lead time. So we are pleased to be in that business. Between 60%-65% of our business is natural gas, and even more of a percentage of that is where our growth investment capital is going into. So it should continue to increase as an overall percentage of our portfolio. We are pleased to see that because you are right, I think there is going to be a nearer term potential impact on domestic demand for other hydrocarbons, especially in certain parts of the country.
As it relates to our business specifically, where we have refined product pipelines, which are gasoline, diesel, jet fuel, those assets have a regulatory regime around them that if you see volumes come down a little bit, you can adjust the rate in order to keep your revenue pretty flat or maybe slightly growing even. So we have some built-in protections there, but it is something we talk about. Our internal projections suggest that there is little decline in the volumes that we expect across our footprint. Actually, a little bit of an increase for the next, I think it is a decade and a half, maybe two decades, before we start seeing that level off and then potentially decline a little bit.
The increase is mostly coming from jet?
Gasoline. I think jet stays increasing a little bit, but for us, our main product is gasoline, so that is what we are focused on. You are right, jet does not seem like it has a decline eventually. There is just not much of an alternative. The gasoline impact eventually looks like it is more hybrid related than pure electric vehicles. It seems like that is where the demand has really materialized. That, and efficiencies of ICE vehicle engines.
David, maybe we could go to the Tennessee Gas Pipeline open season, the TGP 219 South Project. That is closed now, the open season.
Right.
Any sense of how demand came in on that? I think you were soliciting around 500 million cubic feet a day. Just any update on demand for that project.
This is our TGP 219 South P roject, which, just over half a B a day of demand was in the open season. The open season was very positive. It was a favorable open season. It was non-binding, and it will take a little bit of time to go back and solidify shipper commitments and so forth, but the open season results were very strong and positive. We will see where that goes eventually, but there is definitely a lot of demand there. This would move gas out of the Pennsylvania area to Tennessee. We would expect that we would have demand to potentially feed power generation demand along the way. It is just another piece of the puzzle to solve the incremental demand for power generation load in that part of the country.
The company has talked about potentially a larger expansion of Tennessee Gas Pipeline, which could feed into the Southeast. How capital efficiently can you do that and go above the 500 million cubic feet a day and what are the limits on how big you could go on a TGP expansion, pulling gas out of Appalachia to the Southeast?
I am not going to comment on the specific upper threshold because I think it is going to depend on the amount of the rate that shippers are going to be able to bear, because it is not a cheap expansion to go much higher than the one that we had in the non-binding open season. But it could be multiple times the 500.
Multiple times 500 million cubic feet a day.
Right
That you could eventually get to.
Right.
Okay. Interesting. Any other questions from the audience? Okay. Well, one follow-up just on the Southeast piece. You've historically talked about expanding Mississippi Crossing, which will bring gas from the west, from TGP into the SNG network. Is that project still something that you're actively assessing to bring gas into SNG, or is the new Southeast Connector taking a different approach on how you source gas into the Southeast?
It's something that is not going to be as focused as much for now. I think for right now, the connector is going to be priority, but it is something that we've continued to have at least early stage conversations with potential counterparties on.
Okay. Beyond bringing gas out of Appalachia and then bringing it to demand in the Southeast, maybe you could talk about what other areas of your footprint you're seeing growth, whether that's Florida, the desert Southwest, upper Midwest even. Just other areas you're seeing growth across your footprint.
Well, one area that we're seeing growth in is Texas. Power generation demand, LNG demand still, and then of course, demand for additional supplies to reach all of these different markets. One of the projects that we've talked about publicly is this Permian Link project, which would be feeding demand in the Panhandle, a little bit of New Mexico, maybe reaching into Oklahoma. It would be an NGPL project. It's gotten some really good traction, I would say. It's not in our backlog, but it's something that I think we have some real demand to feed power generation, and those negotiations are going well.
How does the new WhiteWater pipes, because WhiteWater kind of went big.
Yeah.
Not one pipe, but we're going to build two monster 48 in pipelines out of the Permian. How does that impact discussions on doing a project like Permian Link, where you're pulling gas out of the Permian?
Right. Great question. This one is uniquely positioned, I think, because it's a demand pull project. It's not a supply push. We think it's relatively insulated from an impact from Solitude.
M&A.
The other piece, I'm sorry, one other.
Yeah.
Keith, comment there is because NGPL has some well-positioned storage, I think that's also an added advantage for that project relative to pipelines that are just pulling out of the Waha area.
Wanted to ask on M&A, the company seems to do smaller tuck-ins, it seems maybe every couple of years or so. How important are acquisitions as part of the strategy from here, and is that part of what you want to accomplish over the next five years to try to further build out the platform, or is that less of a priority because of all the organic growth you're seeing?
I think I view acquisitions in this environment that we're sitting in, I think it speaks to the latter point that you just made as just bonus, as extra. Because the opportunities that we have to build organic projects and build these new infrastructure projects across the country are adding nicely to our bottom line, to the extent that we can also execute on some acquisitions that are accretive to the company, I think it's just bonus. We have had some really good opportunities here recently in the last five years to make some acquisitions that have made a ton of sense. As you know, we don't really compete well on acquisitions just from a cost to capital standpoint. The acquisitions that we've achieved are those that have integrated into our system really well.
The NET Mexico acquisition in South Texas, the Monument acquisition that we did this year in the Houston area that integrates into our Texas intrastate footprint, allowing us to serve our customers more efficiently, provide more options to our customers. Those types of acquisitions are really nice because it is not eating into the balance sheet capacity because it comes with real-time cash flows. In most cases, the reason we are successful in those acquisitions is because we are able to add certain commercial synergies by combining our two systems. It gives us better opportunities to serve our existing customers and maybe serve the customers on the acquired assets more efficiently or more effectively.
Any last questions from the audience? Okay. Maybe we have talked a lot about projects and future growth. I do not want to overlook, the company has actually had a really great year performance-wise. You are well ahead of your budget. There is some kind of debate a little bit of how much of that is more one-time-ish based on market conditions this year and how much you see as repeatable into the future. How would you characterize that and the amount of outperformance this year?
We have had in the neighborhood of $225 million of one-time non-recurring business this year, and that is the FERC, or sorry, the Winter Storm Fern cold weather storm in the wintertime, plus some extended cold period that we enjoyed in the Northeast area. We had some FERC retroactive billing relief, a contract buyout in our terminals business, the Waha blowout, the Waha basis spread blowout. Those were all what I would characterize as non-recurring necessarily. Some of those things, like cold weather, you could see that from time to time. You could see basis points blow out and the spreads blow out, especially in today's environment where these natural gas pipelines are full. If you have disruptions from period to period in geographies, you have a great opportunity to see additional margin as a result of that.
But as it relates to our actual outperformance this year, it has been about $225 million that we would not put into our budget for next year. Plus, we have had some commodity price benefits from the Iran war. We do not have a lot of exposure to commodity prices, but our budget was for $60 oil, and we have seen year-to-date average north of $80 per barrel. So $20 per bbl swing, it makes an impact. We estimated around $100 million for us. So $325 million or so collectively that some of that is commodity price, and we will see what the forecast looks like next year. The rest of that outperformance, though, has just been market conditions, and we think that those market conditions should largely continue into next year.
Our ability to generate additional margin on our Texas intrastate business, our ability to recontract capacity in our interstate business at higher rates, greater volumes, provide additional services to our customers. I think those are the things that we should see continue into next year. We've had some additional outperformance on our CO2 volume side as well. I think that one's a little bit more questionable whether or not that'll continue to next year, but really good outperformance in that area too.
Great. We'll leave it there. Thank you, David.
All right.
For joining us for this. Thank you.