How Kinder Morgan, Inc. Makes Most of Its Money

By Matthew DiLallo Markets Fool.com

Kinder Morgan (NYSE: KMI) is a behemoth when it comes to energy infrastructure in North America. It's the largest independent transporter of petroleum products in North America, transporting 2.1 million barrels per day. The company is also the biggest transporter of carbon dioxide on the continent, moving 1.3 billion cubic feet per day. Furthermore, it's the largest independent terminal operator with 152 million barrels of liquids storage capacity across its 155 terminal sites. It operates the only oil sands pipeline service to Canada's west coast as well.

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It, however, makes the bulk of its money on its natural gas pipeline network, which unsurprisingly is also the largest in North America. Overall, it operates 70,000 miles of pipeline, which is almost enough to circle the globe three times. Here's a closer look at the business that does most of Kinder Morgan's heavy lifting.

Image source: Getty Images.

A $4.2 billion juggernaut

As the chart on the slide below shows, 55% of Kinder Morgan's projected $7.7 billion in earnings before depreciation and amortization (EBDA), or more than $4.2 billion, will come from its natural gas pipeline segment this year:

Data source: Kinder Morgan investor presentation.

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That segment consists of three business lines: interstate pipelines; intrastate pipelines and storage; and gathering, processing, and treating assets. The largest portion of its revenue comes from interstate pipelines, which are long-distance pipelines that carry gas from production basins to market centers, similar to the U.S. highway system. The company owns stakes in several large interstate systems, including the Natural Gas Pipeline Company of America (NGPL), which it jointly owns with Brookfield Infrastructure Partners. These are backbone systems that support the country's gas demand. NGPL is the largest transporter of natural gas to the Chicago market and one of the biggest interstate gas systems in the country at 9,200 miles. Overall, 73% of the company's natural gas pipeline earnings comes from its interstate pipelines, which supply steady income due to the take-or-pay capacity contracts underpinning the assets, limiting its exposure to volume fluctuations.

The next largest revenue generator for Kinder Morgan's gas pipeline segment consists of its gathering, processing, and treating assets, which supply 18% of its earnings. While 88% of that cash flow is from fixed-fee contracts, only 27% are take-or-pay, so it does have some volume exposure with these assets. It operates several midstream systems across the country, including a system supporting the Bakken shale, which it bought for $3 billion from the CEO of Continental Resourcesin 2015. That system consists of 1,800 miles of gas-gathering lines, four processing plants, two treating facilities, three NGL fractionation facilities, and several other oil-related assets.

Finally, the company operates several intrastate gas pipelines and storage assets, which account for 9% of its gas pipeline segment revenue. These assets operate within state borders and are similar to a state highway system, transporting gas from an interstate system to local markets. One such system is the Kinder Morgan Louisiana Pipeline system, which consists of two pipelines that originate at the Cheniere EnergySabine Pass LNG export terminal in Louisiana. The 135-mile system moves gas from NGPL to the Cheniere facility while the other pipeline connects to a separate interstate system in Louisiana.

Image source: Kinder Morgan.

Big today and even bigger tomorrow

Not only does Kinder Morgan's natural gas pipeline segment supply an outsized portion of its current income, but it will be one of the company's leading growth drivers in the future. Currently, the company has $12 billion of growth projects in its backlog, including $3.5 billion related to the natural gas pipeline segment. That suggests the division will contribute about 30% of its growth going forward, though it could become a higher percentage given some of the strategic initiativesit is working on at the moment.

The largest project in that pipeline is the nearly $2 billion Elba Island LNG export facility in Georgia, though the company did recently find a 49% partner to help fund a portion of that project. That said, the company expects the first phase of the project to enter service in the middle of next year, with the final phase starting up in early 2019. The company has 100% of the facility's capacity under 20-year contracts with Royal Dutch Shell, which will supply it with steady cash flow for those two decades. Another major project is a capacity expansion at the other end of NGPL, supporting demand in the Gulf Coast region, which should enter service next year. NGPL's growth projects should support an 11% compound annual earnings increase on the system over the next five years according to Brookfield Infrastructure Partners. In addition, Kinder Morgan is expanding its Louisiana Pipeline to support a planned capacity expansion at Cheniere Energy's Sabine Pass facility. These are just some of the many projects the company currently has underway to expand its gas pipeline empire, which should continue to grow as it adds more projects to its backlog.

Investor takeaway

While Kinder Morgan is a behemoth in the energy infrastructure space, more than half of its profits come from natural gas pipelines. That's not expected to diminish anytime soon because the company has a large backlog of projects coming down the pipeline. Given the relatively stable nature of these assets, it suggests that Kinder Morgan's income should grow, and with it, an ability to steadily increase its dividend in the future.

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Matt DiLallo owns shares of Brookfield Infrastructure Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.