Kinder Morgan, Inc. (KMI) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary presents a positive outlook with strong financial performance expectations, strategic acquisitions, and expansion projects on track. The Q&A section reveals management's confidence in demand growth and strategic positioning, despite some vague responses. The acquisition, project backlog growth, and tax benefits further support a positive sentiment. However, the lack of specific guidance on certain financial benefits and project details tempers the enthusiasm slightly. Overall, the combination of strategic moves and positive market positioning suggests a positive stock price movement in the short term.

Key Financial Performance

Adjusted EBITDA Increased by 6% year-over-year for Q2 2025. The growth was driven by greater contributions from natural gas expansion projects, the Outrigger acquisition, and favorable demand on assets.

Adjusted EPS Increased by 12% year-over-year for Q2 2025. This growth was attributed to favorable mark-to-market on unsettled hedges and contributions from natural gas capacity sales and other services.

Net Income $715 million for Q2 2025, which is 24% above the second quarter of 2024. The increase was driven by contributions from natural gas expansion projects, the Outrigger acquisition, and favorable demand.

Transport Volumes (Natural Gas) Up 3% year-over-year for Q2 2025, primarily due to LNG deliveries on Tennessee Gas Pipeline and new contracts on the Texas Intrastate system.

Natural Gas Gathering Volumes Down 6% year-over-year for Q2 2025, primarily due to lower gas prices in the second half of 2024. However, volumes are expected to grow over the balance of the year due to higher prices and increased production to meet LNG demand.

Refined Products Volumes Up 2% year-over-year for Q2 2025. This increase reflects steady demand in the refined products market.

Crude and Condensate Volumes Up 2% year-over-year for Q2 2025, reflecting steady demand.

CO2 Segment - Oil Production Volumes Down 3% year-over-year for Q2 2025. This decline is part of a broader trend in the CO2 segment.

CO2 Segment - NGL Volumes Up 13% year-over-year for Q2 2025, reflecting increased production in this segment.

CO2 Segment - CO2 Volumes Down 8% year-over-year for Q2 2025, reflecting lower production in this segment.

Dividend Declared at $0.2925 per share for Q2 2025, which is 2% higher than the 2024 dividend.

Net Debt to Adjusted EBITDA Ratio 4.0x for Q2 2025, down from 4.1x in Q1 2025. This improvement reflects better financial management and contributions from the Outrigger acquisition.

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Operating Highlights

Outrigger acquisition: Contributed to exceeding the original budget for 2025, with adjusted EBITDA growth increasing to 5% and adjusted EPS growth at 10% from 2024.

New projects added to backlog: $1.3 billion in new projects added, including Trident Phase 2 and Louisiana Line Texas Access project, which focus on moving natural gas to the Louisiana LNG market.

Expansion projects: Evangeline Pass project and South Texas to Houston project are now in service, contributing significantly to 2025 growth.

Global LNG demand: Global gas demand is expected to increase by 25% over the next 25 years, driven by population growth in Asia and Africa. U.S. LNG exports are positioned to play a critical role in meeting this demand.

U.S. natural gas demand: Expected to grow by 20% between now and 2030, supported by improved federal permitting and tax incentives.

Transport volumes: Increased by 3% in Q2 2025 compared to Q2 2024, driven by LNG deliveries and new contracts.

Project backlog: Increased from $8.8 billion to $9.3 billion, with approximately $750 million of projects placed in service.

Jones Act tanker fleet: Fully leased through 2025, with 97% leased through 2027, benefiting from higher market rates and extended contract lengths.

Stable fee-based assets strategy: Focus on owning and operating core energy infrastructure assets, investing in high-return projects, and returning money to shareholders while maintaining a solid balance sheet.

Credit rating improvement: Moody's and S&P placed the company on positive outlook, leading to improved credit spreads.

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Risk or Challenges

Tariffs: The impact of tariffs on project economics is a concern, though currently estimated to be roughly 1% of project costs for large projects. This could still pose a challenge if tariffs increase or if unforeseen costs arise.

Natural Gas Gathering Volumes: Natural gas gathering volumes were down 6% in Q2 2025 compared to Q2 2024, with a 3% decline expected for the full year compared to the 2025 budget. This decline is attributed to lower gas prices in the second half of 2024, which has delayed ramp-ups by producer customers.

CO2 Segment Performance: The CO2 segment experienced lower oil production volumes (down 3%) and lower CO2 volumes (down 8%) in Q2 2025 compared to Q2 2024. Full-year oil volumes are forecasted to be 4% below 2024 levels and 1% below the 2025 budget.

Debt Levels: Net debt increased by $623 million from the beginning of the year, with a net debt to adjusted EBITDA ratio of 4.0x. While this is a slight improvement from Q1, high debt levels remain a potential risk to financial flexibility.

Regulatory and Permitting Risks: While the permitting environment has improved, there is still a risk of delays or challenges in obtaining necessary approvals for projects, which could impact timelines and costs.

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Guidance & Outlook

Global Gas Demand: Global gas demand is expected to increase by 25% over the next 25 years, driven by population growth and rising energy needs in emerging markets, particularly in Asia and Africa. LNG demand is projected to grow faster than overall natural gas demand.

U.S. LNG Exports: U.S. LNG exports are expected to play a critical role in meeting international LNG demand, with feed gas demand in America projected to increase by 3.5 Bcf/day in summer 2025 compared to summer 2024 and more than double by 2030.

U.S. Natural Gas Demand: U.S. natural gas demand is expected to grow by 20% by 2030, supported by strong market fundamentals and improved federal permitting processes.

Project Backlog and Investments: The project backlog increased from $8.8 billion to $9.3 billion, with $1.3 billion in new projects added. Approximately 50% of the projects in the backlog will serve power demand. Significant future investment opportunities remain available.

Capital Expenditures and Tax Benefits: Significant cash tax benefits are expected in 2026 and 2027, with no material cash tax payments anticipated until 2028. Tariffs are not expected to significantly impact project economics, with an estimated impact of roughly 1% of project costs for major projects.

Natural Gas Gathering Volumes: Natural gas gathering volumes are expected to grow over the balance of 2025, driven by higher gas prices and increased production to meet LNG demand growth.

Refined Products and Crude Volumes: Refined products volumes are forecasted to be approximately 2% higher in 2025 compared to 2024, while crude and condensate volumes are also expected to grow.

Jones Act Tanker Fleet: The Jones Act tanker fleet is fully leased through 2025, with 97% leased through 2027. Higher market rates and extended contract commitments are expected to support strong performance.

Adjusted EBITDA and EPS Growth: Adjusted EBITDA growth for 2025 is expected to exceed the original budget by at least the contribution from the Outrigger acquisition, with adjusted EPS growth projected at 10% from 2024.

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Shareholder Return Plan

Dividend Declaration: Kinder Morgan declared a dividend for the quarter of $0.2925 per share, which is $1.17 per share annualized. This represents a 2% increase from the 2024 dividend.

Shareholder Return Strategy: The company emphasized its strategy of using significant cash flow generated by its stable fee-based assets to invest in attractive return projects and return money to shareholders, while maintaining a solid balance sheet.

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Key Q&A

Q:Do you think the commercial landscape has changed with these demand tailwinds on a structural basis? What has allowed Kinder to win many of these projects?

A:Kimberly Allen Dang explained that Kinder's competitive edge comes from its existing asset footprint, trust in its ability to deliver projects on time, and strong customer service. These factors have contributed to their success in winning projects and expanding their commercial backlog.

Q:What is the progress on building additional natural gas infrastructure from the Permian, and what would the Copper State Connector amount to in terms of cost economics and potential expansions?

A:Kimberly Allen Dang mentioned that there is a clear need for natural gas in Arizona, with utilities and data centers being potential customers. The Copper State project could cost $4 billion to $5 billion, but it faces challenges like competitive processes and changing tariffs. Kinder will remain disciplined in capital deployment and ensure projects meet return thresholds.

Q:How do you approach capital allocation between gas pipelines and gathering investments?

A:Kimberly Allen Dang stated that there is no change in their investment decision-making process. They evaluate risk and reward, considering factors like contract length, creditworthiness, and exposure to commodity or volume risks. Investments with higher risks require higher returns within their target range.

Q:What is the update on behind-the-meter opportunities and their potential as a driver of future CapEx?

A:Kimberly Allen Dang and Sital K. Mody explained that most activity is from regulated utilities, which can include projects in their rate base. Kinder is focusing on speed-to-market opportunities and collaborating with partners specializing in data center construction. They are exploring broader projects tied to behind-the-meter opportunities.

Q:How do you expect the mix of power utilities and LNG projects in your gas backlog to trend in the future?

A:Kimberly Allen Dang noted that LNG is the biggest driver of demand growth, but power demand is also significant and often underestimated. The mix will depend on project developments, with LNG projects typically requiring initial pipelines to liquid points and subsequent expansions for competitive and diversified supply.

Q:What are the financial benefits of the new tax rules, and do they change your investment strategy?

A:David Patrick Michels stated that the tax reform provides substantial benefits starting in 2026, with no material federal income tax expected in 2026 and 2027. However, the incremental cash flow does not change Kinder's investment strategy or return thresholds.

Q:What is the outlook for the Texas-Arkansas Power project and potential demand in that region?

A:Sital K. Mody mentioned that there is incremental demand in Arkansas, Texas, and the Midwest corridor. The project supports power demand, but the exact end-use of the power is often unclear as the customer is typically the power plant.

Q:What is the impact of Georgia Power's IRP filing on expansion opportunities in the Southeast?

A:David Patrick Michels indicated that the fundamentals and opportunity set in the Southeast look sound. Kinder is well-positioned with its network and is exploring ancillary expansion opportunities.

Q:What is driving the incremental demand for the Trident pipeline, and what are the details of the NGPL projects added to the backlog?

A:Kimberly Allen Dang explained that the Trident pipeline's demand is driven by LNG, with expansions achieved through added compression. NGPL projects in the backlog are power-related, serving demand in Arkansas and Wisconsin.

Q:When do LNG projects typically sign up for gas takeaway, and how does Kinder's infrastructure benefit from this demand?

A:Kimberly Allen Dang stated that LNG projects usually secure gas takeaway to obtain financing for FID. Additional projects for competitive and diversified supply are developed closer to in-service dates. Kinder's extensive Gulf Coast infrastructure is well-suited to meet this demand.

Q:What is the risk of Permian overbuild affecting rates for Kinder Morgan later in the decade?

A:Kimberly Allen Dang and Sital K. Mody noted that GCX and PHP pipelines have attractive rates and are integrated into Kinder's Texas intrastate system. They assume conservative economics with potential rate step-downs in their projections, minimizing risk.

Q:What is the timeline and volume ramp for the Haynesville gathering project, and how does it align with LNG growth?

A:Sital K. Mody stated that the Haynesville expansion will be in service by Q4 next year, with volumes ramping up along the way. The Haynesville's proximity to demand centers makes it a key supplier for LNG and other markets.

Q:Could permitting improvements accelerate timelines for larger projects?

A:Kimberly Allen Dang explained that the impact depends on procurement schedules. Some projects could move up by about 5 months, while others may not benefit. The increase in the prior notice limit to $61 million will expedite smaller projects.

Q:What are the incremental opportunities for LNG outside the Haynesville, and which basins are next to meet growth?

A:Sital K. Mody highlighted the Lean Eagle Ford, Permian, and potentially the Utica and Marcellus basins as key suppliers. Kinder is also exploring opportunities to connect Bakken gas to demand centers.

Q:What is the strategy for gaining volumes in the Bakken and securing higher rates?

A:Sital K. Mody mentioned that Kinder is integrating the Outrigger deal and exploring network debottlenecking. Progress is being made, but no specific updates were provided.

Q:Is there concern about a slowdown in LNG growth after the current wave of capacity?

A:Kimberly Allen Dang and Thomas A. Martin stated that they see no slowdown in LNG project announcements or expansions. U.S. LNG infrastructure is well-positioned to meet global demand growth, with a doubling of LNG's share in global gas demand expected by 2050.

Q:What are the incremental opportunities for Kinder outside the Haynesville to support LNG growth?

A:Sital K. Mody mentioned the Lean Eagle Ford, Permian, and Bakken as key areas. Kinder is also evaluating opportunities to move gas from the Utica and Marcellus to demand centers.

Q:Does the expanded interest deductibility from tax reform affect Kinder's financing strategy?

A:David Patrick Michels stated that the tax reform does not influence Kinder's financing strategy, which remains focused on refinancing maturing bonds and funding growth projects internally.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on certain topics, such as the exact incremental cash flow benefits from tax reform, the size of the Haynesville expansion capacity, and the specifics of NGPL power projects. Additionally, they used vague language when discussing the potential for Permian overbuild and the exact impact of permitting improvements on project timelines.

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