Kinder Morgan Inc - Class P (KMI) — Q4 2025 Earnings Call Transcript

Thank you, Michelle. 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 disclosures 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. I have only 2 comments before turning the call over to our CEO, Kim Dang and the team. First, we believe our bullish outlook on natural gas demand remains grounded in reality, and we expect to see very strong growth over the rest of this decade and beyond. Now while there are several important drivers of that growth, the largest and most certain driver remains the need for additional LNG feed gas to service both expansions of existing export facilities and new greenfield projects coming online. We now estimate feed gas demand will average 19.8 Bcf per day in 2026, which is an all-time record, an increase of 19% from the daily average of 16.6 Bcf per day in 2025. And we see that demand increasing to over 34 Bcf per day by 2030. This astounding growth is enormously beneficial to the midstream sector and especially to companies like Kinder Morgan that have extensive pipeline networks along the Texas, Louisiana Gulf Coast, which is the location of most of the export terminals present and future. Our throughput agreements for delivery of the feed gas are essentially take-or-pay in nature which gives us great confidence in the resulting cash flow. My second comment is specific to Kinder Morgan. You will hear from Kim and the team that we finished 2025 very strongly compared to 2024 and to our budget for 2025. And as you know from our earlier release of the budget for 2026, we expect more good performance this year. Once again, the chief driver of our success in both years is the extraordinary strength of our natural gas assets. And with that, I'll turn it over to Kim.

Thank you, Rich. As mentioned, we had an excellent fourth quarter, achieving record results for both the quarter and the year, significantly better than we expected when we released our Q3 results. For this quarter, adjusted EBITDA increased by 10% compared to the fourth quarter of the previous year, and adjusted EPS rose by 22%. These are impressive figures for a stable midstream business like ours. The main factor contributing to our success was natural gas, which had a remarkable quarter and year. Our project backlog has grown by about $650 million to reach $10 billion. We added just over $900 million in new projects, which was balanced out by $265 million worth of projects placed in service. The two most notable additions are the Florida Gas Transmission projects, each backed by long-term shipper contracts. Our backlog multiple remains below six times, which will facilitate strong growth in the coming years. Additionally, we are exploring over $10 billion in project opportunities beyond the existing backlog. While we may not achieve success in all these projects, it highlights the significant market opportunity available to us. We anticipate finding appealing prospects for years ahead. According to Wood Mackenzie, the U.S. natural gas market is expected to grow in the long term, with an additional 20 Bcf a day of demand growth projected between 2030 and 2035. Regarding our three largest projects, MSX, South System 4, and Trident, we initiated construction on Trident last week. For MSX and South System 4, we received our FERC scheduling order, with the FERC expected to issue our final certificate by July 31, ahead of our original expectations. There is still a considerable amount of work to be done, but all three projects are on budget and either on or ahead of schedule. Last week, S&P also upgraded KMI to BBB+, indicating our balance sheet is robust. On the management side, I want to acknowledge Tom Martin, who will retire at the end of this month. We value his wise counsel and the significant contributions he has made to our shareholders in his 23 years with the company. As previously noted, Tom will remain as an adviser to the OCC and the Board, allowing us to continue benefiting from his insights. We are excited to have Dax, known to many of you from his long service with the company, step into the President's role. I look forward to collaborating closely with him as we carry on with our strategy. In summary, we had a fantastic quarter and year, strengthened our balance sheet, and progressed key projects with a $10 billion backlog, positioning us for a very promising future. Now, I'll hand it over to David.

Thanks, Kim. I appreciate the kind words. Starting with the natural gas business unit, transport volumes were up 9% in the quarter versus the fourth quarter of 2024, primarily due to increased LNG feed gas deliveries on Tennessee Gas Pipeline. For the full year transport volumes were up 5% over 2024. Natural gas gathering volumes were up 19% in the quarter from the fourth quarter of 2024 across all of our G&P assets with the largest impact being from our Haynesville system. Sequentially, total gathering volumes were up 9%, and the full year 2025 gathering volumes were up 4% versus 2024. We experienced a significant ramp-up from our producer customers during the quarter to meet the growing LNG demand. Our Haynesville gathering system, for example, set a daily throughput record of 1.97 Bcf a day on December 24. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network. For example, we are in various stages of development to potentially serve more than 10 Bcf a day of natural gas demand in the power generation sector. In our Products Pipeline segment, refined products volumes were down 2% in the quarter compared to the fourth quarter of 2024. For the full year 2025, refined products lines are about equal to '24. Crude and condensate volumes were down 8% in the quarter compared to the fourth quarter of 2024. More than all of that decline is driven by taking HH out of service for the NGL conversion project early in the third quarter of 2025. Excluding HH volumes in both periods, crude and condensate volumes were up 6% in the quarter compared to the fourth quarter of '24. On January 16, 2026, KMI and Phillips 66 announced the start of the second open season on their proposed Western Gateway Pipeline system. Western Gateway Pipeline will connect Midwest and other refinery supply to Phoenix and to California with connectivity to Las Vegas, Nevada via KMI's CALNEV Pipeline. The second open season, which concludes on March 31, 2026, is for the remaining pipeline capacity and adds new access to the Los Angeles market via a joint tariff supported by the planned reversal of one of KMI's existing SFPP lines between Watson and Colton, California. In addition to expanding the offered destinations, the second open season adds additional origin points to enable supply diversification and optionality for our customers. We believe this project provides an attractive supply alternative for markets in Arizona and in California.

Thank you, Tom. This quarter, we are announcing a quarterly dividend of $0.2925 per share, which translates to an annualized amount of $1.17, reflecting a 2% increase from 2024. In the fourth quarter, we reported net income attributable to KMI of $996 million and earnings per share of $0.45, which are 49% and 50% higher than in the fourth quarter of 2024. This quarter's results included a gain from an asset sale that we classify as a certain item. Even when excluding certain items, our adjusted net income and adjusted earnings per share still increased significantly, both up 22% from the fourth quarter of 2024. Our growth stemmed from newly implemented natural gas expansion projects, contributions from our Outrigger acquisition, and sustained strong demand for natural gas transport, storage, and related services. For the full year 2025, we surpassed our budget considerably, driven by our natural gas business, which saw increased value in transport capacity and ancillary services. Our Terminals segment also exceeded budget expectations. We initially projected a 4% growth in adjusted EBITDA and a 10% growth in adjusted earnings per share from 2024, but we actually achieved a 6% growth in adjusted EBITDA and a 13% growth in adjusted earnings per share. Our 2025 EBITDA and net income reached record highs for Kinder Morgan. Regarding the balance sheet, as we continue to enhance our cash flows and maintain a disciplined approach to capital allocation, our balance sheet has strengthened. Our net debt to adjusted EBITDA ratio has improved to 3.8 times, down from 3.9 times last quarter and 4.1 times at the end of the first quarter, right after the Outrigger acquisition. Since the end of 2024, we've reduced our net debt by $9 million, despite nearly $3 billion in total investments for growth and the acquisition. To provide a high-level reconciliation, we generated cash flow from operations of $5.92 billion. We allocated $2.6 billion for dividends and invested $3.15 billion in total capital expenditures, which includes growth sustaining projects and contributions to joint ventures. We spent about $650 million on the Outrigger acquisition and received $380 million from divestitures, primarily from the EagleHawk sale. Other items contributed about $100 million in cash. This accounts for the $9 million reduction in net debt for the year. The rating agencies have acknowledged our improved financial profile. Last week, S&P upgraded us to BBB positive, and Fitch raised us to BBB+ during the summer of 2025, while Moody's has us on a positive outlook. As already noted, but worth repeating, 2025 was an exceptional year, a record-breaking year, in fact. We exceeded our budget and delivered double-digit earnings growth. Our backlog grew from $8.1 billion to $10.0 billion despite placing $1.8 billion of projects into service, which means we added $3.7 billion of projects to the backlog during the year. We improved our balance sheet, achieved credit rating upgrades, and expect significant cash flow benefits from tax reform, which will enhance our investment capacity. We have strong positive momentum as we head into 2026. I will now turn it back to Kim.

Okay, Michelle, if you'll come back on, and we'll take questions.

Look, if I can kick it off more on the data center front. You guys talk about the 70% number with respect to where you have exposure and aligned with data center opportunities. Can you talk a little bit about what you're seeing actively on that front? Obviously, we saw the FTC announcement here, perhaps that speaks to that a little bit. But how do you think about that regionally in terms of further data points we should be seeing through the course of the year? And I've got a quick follow-up.

Okay. I'm not exactly sure about the 70%. But if you look at our $10 billion backlog, about 60% of our backlog is associated with power projects. That's not just data center, that's anything associated with power. And if you think about the opportunities on the power side, I think a great example is if you look in the state of Georgia, where Georgia Power, recently, I think the end of November, filed a revised IRP. And they're projecting 53 gigawatts of power demand between now and the early 2030s. And so from a gas perspective, if that was 100% gas, that would be like 10 Bcf a day, roughly, depending on the conversion metrics you use. And we expect that a significant portion of that will be gas, and that's just one utility in one state. And so what we're seeing across our network, whether that's in Georgia, South Carolina, Louisiana, Arkansas, Texas, or New Mexico, Colorado, we are seeing similar stories just across our network. And the other thing is you look at power demand, we've got a higher power demand growth between 2025 and 2030. Wood Mac has in their most recent estimates increased theirs. And if you look at Wood Mac between 2030 and 2035, they think the power growth, at least in their projections, is greater between 2030 and 2035 than it is in their projections between '25 and '30. So this is something that is driving a significant amount of projects. It's also a significant driver of the potential opportunities that we have, and we think will last for a decade.

Excellent. If I can get more clarity on the SSE5 setup and timing, what are your plans for moving forward? How are you approaching the timing? More specifically, are you considering this as a compression-first project or a looping project initially? Also, what level of signed utility load would allow for a more formal filing?

Yes, Julien, this is Sital. So look, in terms of timing, we see strong interest in the Southeast, and we continue to work with the customer base. In terms of what the final scope looks like, that all depends on final subscription. I do see it more than just compression. I think there could be some more brownfield looping. But once again, it's early. We're working through the demand dynamics with our customer base. We do see opportunity there, and it is competitive. So we will continue to report as we go along. But ultimately, the signed deal is what drives the announcement.

First, I just wanted to start on the next steps on the Western Gateway following the second open season launch last week. How do you think about allocating capital towards this project versus natural gas opportunity set? And how do those returns compare?

Yes. For every project, we evaluate the risk and return. We expect a moderate return and then adjust that based on the stability, duration, and credit quality of the cash flows. Stronger creditworthy parties with longer cash flows and take-or-pay agreements will slightly reduce the expected return. Conversely, if those conditions are less favorable, we may exceed that return. All these returns significantly surpass our cost of capital. If we move forward with Western Gateway, we will establish long-term contracts with shippers, primarily from creditworthy counterparts. If necessary, we would have some credit support. At this stage, we do not have limited capital. We can easily finance this project alongside all the natural gas projects we are considering.

Got it. That's helpful. And then just as a follow-up, leverage ended around 3.8x in the quarter. How do you think about maintaining leverage levels towards the midpoint of your long-term guide of 3.5 to 4.5x range versus leveraging up towards that high end if there are multiple CapEx opportunities?

Well, I'd say right now, what we've said is we're going to spend about $3 billion per year in CapEx. Now that won't be a perfect ground, $3 billion because you just have timing of spend, but roughly $3 billion a year. And we have the ability to fund that 100% out of cash flow. The other thing I'd point out is that as our $10 billion backlog of projects come online that our debt-to-EBITDA actually declines over time. And so that creates more balance sheet capacity. So for every 0.1x of leverage, that's $850 million of capacity. So I think we've got a ton of capacity even without leveraging up closer to the 4.5x. And I don't think we have the intention of getting close to that level. So I think we've got plenty of capacity to accommodate the opportunities that we see out there.

Kim, I hear you loud and clear on the less than 50% of capital contribution on Western Gateway because you're contributing SFPP. When we think about the net EBITDA impact to Kinder, and I'm assuming this project moves forward, how should we quantify the displacement of existing SFPP EBITDA? How much is that contributing currently?

I believe we are still in the early stages. We need to get through the open season and finalize our negotiations with our partner regarding the specifics. Therefore, it's important to conclude the cost evaluations as well. At this moment, it feels too soon to discuss those details.

Understood. Maybe turning to a different portion of your liquids business. Could you provide an update on the progress of the HH conversion? And in light of recent upstream developments in the Bakken and the increasingly challenged near-term outlook for the basin, how are you thinking about the expected NGL throughput and EBITDA contribution from this project?

Sure. I mean, the project is going to come on probably late first quarter, early second quarter and that's Phase 1. And then with respect to the future phases, that's something we continue to work on.

Yes. Broadly speaking, given the recent pullback, it is just a matter of time. I believe our initial phase is well contracted, and we see the volumes behind it coming from our plants, so we have visibility there. For Phase 1, I think we are still on the earlier side of the timeframe Kim mentioned. As for the next phase, we continue to have positive discussions with our customers. We will monitor the overall macro situation and make investment decisions accordingly. That said, we still have that ahead of us.

Right, and I think the other thing is GORs are growing in the Bakken.

Yes, maybe if I could just ask maybe a different way at the same question to some degree, with Continental Resources effectively saying they're going to stop drilling in the Bakken. I'm wondering if you can talk about, at least for now, can you talk about how meaningful a customer they are, either your current business? Or where they were contemplated to be for HH and if that has an impact on the further expansion?

So yes, if you look at the EBITDA that we get from Bakken or EBITDA, it's about 3% of Kinder Morgan overall. Obviously, Continental makes up a piece of that. We don't think that there's going to be any material impact from the Continental news. We think that the impact is very manageable, that's one because it's 3% of our EBITDA. But it's also because volumes came into the year a little stronger than we were expecting. And it's also because they're going to continue to complete wells through August and because they are just one of a number of customers we have up there.

Let me discuss the EagleHawk sale first. Initially, we weren't planning to sell that asset. Our partner approached us because they were looking to sell part of their interest, and based on the price we could achieve, it made sense to proceed with the sale. We realized an 8.5x multiple on a nonoperated minority interest in the GMP asset. When analyzing the reinvestment opportunity, specifically, if we were to buy at the proposed sale price and evaluate the cash flows, it would be below our cost of capital, even considering any tax implications from the sale. Consequently, we concluded that selling the asset and recycling that capital was a sound economic decision. This reflects our general approach to asset sales, which has been more opportunistic. We always consider our assets to be for sale at the right price, aiming to make sound economic decisions. We are pleased with our current asset portfolio, which comprises 60% natural gas and 26% in products, pipelines, and terminals, resembling a typical pipeline and storage business. Additionally, 7% is CO2, which is somewhat different, but it delivers excellent returns, and we possess expertise in this area that is rare. Overall, we are very comfortable with our asset suite, and this sale was simply an opportunistic decision that made sense.

I was curious about your thoughts on the overall industry and the opportunities it might present to you in the future, particularly concerning Waha egress. With the cold weather approaching, similar to what we experienced during Uri, which created opportunities for Kinder last time, I would appreciate any insights you could share on this.

We are always analyzing our footprint and, given our position, we are able to take advantage of some market dislocations. Our primary goal is to serve our customers. When opportunities arise, we strategically take a more proprietary approach in certain areas, albeit in small amounts. As these chances come up, we plan to leverage them accordingly.

Yes, but I don't think this storm is comparable to Uri.

It's not a Uri.

I mean it's much shorter in duration and it's not going to be as significant. So...

Understood. It seems like there might be another one on its heels. So we'll see what happens this winter again.

Generally, what I would say is that the gas transportation market is very tight. And so whenever you see dislocations in supplier demand in and around our assets, that is going to present opportunities for us. And that's part of what you saw in the fourth quarter of this year.

Yes. I mean a key component of that is storage for us, and we have a significant storage portfolio that will allow us to leverage some of that to the extent that it presents itself.

Got it. I wanted to focus on NGPL a bit, as there are more opportunities driven by data centers in the Midwest, along with coal to gas switching. Other natural gas pipeline operators are experiencing a lot of activity in that area. Could you discuss what that might mean for Kinder and NGPL?

Yes, we've been engaged in significant discussions and have been sharing some EBB postings. There is interest along the pipeline from both power customers and organic markets looking to expand. It's still early for some of these projects, but we have some binding commitments that we aim to turn into full-fledged FID projects. As these projects develop, we will provide updates. The corridor shows a strong market presence, with interest in producing regions where companies are looking to establish themselves. The opportunity is evident, but we are in a competitive landscape and need to ensure we secure the returns necessary to advance the projects to FID.

You said in the prepared comments that MSX could be in service a couple of quarters early, I think. Is there any read across to a faster permitting process across the board? Or was that project specific?

I think there are a couple of important points regarding these projects. First, the 871 issue has been resolved, which occurred around 6 or 9 months ago. This situation previously required us to wait 5 months after receiving our FERC certificates before construction could begin. Now that it's resolved, the FERC is expected to act on our filing in approximately one year. Historically, we've seen larger projects take longer, so the fact that the FERC process only took 12 months and the absence of the 871 issue is allowing us to advance our in-service date for MSX from the fourth quarter of 2028 to the second quarter of 2028.

Great. That's very clear. And then one of your peers took an equity stake in a U.S. LNG terminal a few months ago. Is that something that KMI is actively looking at or would have interest in, especially, I guess, if you could back to back it with another counterparty to make it take-or-pay equivalent?

To address your question, we've observed that the returns from LNG investments haven't met our expectations for initiating those projects. This isn't our typical area of focus. We did undertake a small project at Elba, but that was limited in scale. Moving forward, we plan to concentrate on our core business, which involves serving LNG demand through our existing pipelines. Currently, we fulfill 40% of that demand, and as mentioned, we anticipate significant growth in this area. We expect to capture our fair share of future demand, which is generating promising project opportunities for us. While we are open to exploring options outside our usual scope, we haven't encountered a situation where the risk-return profile aligns with our standards, and we prefer not to undertake these projects independently.

I think another point we appreciate in terms of risk and return is that we generally have take-or-pay contracts with utility-grade investment-grade utilities for both the LNG terminal feed gas and the service for electric generation. We believe this approach effectively manages the risks we are assuming, which is preferable compared to directly contracting with developers.

You updated the messaging on CapEx to at least $3 billion a year of growth CapEx for the next few years, up from $2.5 billion. Wanted to clarify, is that solely based on the sanctioned project backlog today? So if you keep FID-ing new projects and the backlog grows, CapEx could be above $3 billion a year for the next few years? Or is that already reflecting your best estimate over the next few years?

It's mainly driven by the $10 billion approved project backlog, but there is a small part that comes from some of the $10 billion in the opportunity set. We have updated our expectation from $2.5 billion to $3 billion because of the $10 billion, and we continue to add to the backlog even as we start bringing projects into service. Earlier this year, as we launched those projects, we anticipated a decrease, but gas demand has continued to rise. We expect growth between 2025 and 2030 and possibly beyond. There might be a chance to extend that further, but we are not ready to make that adjustment at this time.

Got it. I wanted to follow up on the earlier question about Mississippi Crossing. If you're six months ahead on that project and potentially on some of the larger ones due to the regulatory environment, will your contracts activate, allowing for nearly complete financial contribution right away at that earlier date? Or is that not the case?

It's a project-by-project analysis. In this case, the answer is no, the customers don't have to take it at that point in time. They can. I mean, they can elect to take it, but they don't have to. And I would say that being early on the regulatory front does not directly translate into day for day on the in-service. It's going to depend on the projects because once you move back that regulatory, once you get sooner approval from a regulatory perspective, you have to think about when you're getting pipe and when you're getting compression. And so, for example, we haven't seen that translate into much of an earlier date on South System 4 at this point in time. So it's project by project. But if our customers don't want that capacity, it will be available for us to use during that time.

Given the macro environment, Keith, when you consider the demand profiles that are emerging, it presents an opportunity for us to sell in the secondary markets.

Firstly, congrats on all the upgrades from rating agencies, reflects the strong quality of the management and execution. I wanted to ask you about the Florida Gas Transmission projects, both the projects. How did these come about? Can you give us more details? And then the last one year, what you have seen is you announced the project and then end up upsizing it. So if you could talk about the possibility of some upsizing here for these projects.

So Manav, this is Sital. So just in terms of the project itself, as you know, we're not the operator. Energy Transfer is the operator. So we'll let them talk about how it came about on the call. We've been working with them closely. Thematically, it's the same themes we've been talking about in the Southeast. We see that as a growth area, just broadly. And this is just another example of us getting incremental infrastructure to an area where there is significant growth. There's also a resiliency component there with the two projects. We think it makes sense in terms of whether or not the project gets upsized. We're in the process of having an open season right now. That open season closes here, I think, Feb 5, if I'm not mistaken. And based on the interest there, is it possible to upsize? Yes, if there's a demand for it.

Yes, I would say both of those projects are supported by long-term contracts with reliable partners.

Perfect. And my quick follow-up here is, at the start of the call, you mentioned that the 4Q turned out to be stronger than what you thought when you announced your 3Q results. So help us understand some of those tailwinds which help you drive the beat in 4Q? And are those still persistent out there? So should 1Q also turn out pretty strong, if you could talk about that.

Sure. It was across the gas network, including our intrastate business, interstate pipes, and gathering assets. As we mentioned earlier, this relates more to the outperformance in the intrastate business.

It's Jason Gabelman from TD Cowen. Hopefully, the storm isn't hitting you too hard down there. Maybe to start and to help everyone out, maybe we could just replay Manav's question because I was interested in the answer to it. I didn't quite hear. So just wondering what drove the earnings upside on the natural gas segment in 4Q. It sounded like some of it was driven by pull from LNG plants. So did some of these plants start up earlier than you had expected in the plan? Or were there other factors at play?

It was widespread across our entire gas business, particularly in the Texas intrastate market, as well as in the Eagle Ford and Haynesville regions related to our gathering assets. Additionally, there were impacts in the interstate markets, especially in the Northeast. This situation arises from having a very tight pipeline and storage network, which creates opportunities during times of supply or demand disruptions. These disruptions could stem from weather changes, LNG fluctuations, or various other factors, leading to volatility and potential advantages for us. There remains the possibility for a similar situation to occur again in 2026.

Great. For my follow-up, I'd like to stay on the topic of LNG. It appears that the market is anticipating a global supply surplus, which may lead to a slowdown in the approval of new liquefaction projects in the U.S. Gulf Coast. I'm curious about how much of the current project backlog is related to supporting additional projects. I suppose we're discussing the shadow project backlog and the LNG projects associated with it.

Yes, I want to highlight a point Rich mentioned earlier. We have long-term take-or-pay contracts with LNG facilities, typically lasting 20 to 25 years, which means they pay regardless of whether or not they use that capacity. Currently, around 12% of our $10 billion approved project backlog is linked to LNG, which is a relatively small percentage. A significant portion of the shadow backlog is likely related to power projects. Additionally, when examining LNG projects, it's important to note that it's not solely about establishing new facilities. Often, existing facilities may have available capacity and they seek to source more competitive supply. Therefore, incremental projects can arise without the necessity of launching a new facility; it may simply involve meeting a demand from an existing facility for more competitive supply.

Okay. Thank you, everybody.

Thank you. Have a good day.