Kinder Morgan (NYSE:KMI) produces a prodigious amount of cash each year. In 2019, the energy infrastructure company hauled in just under $5 billion in distributable cash flow (DCF), which is the money it could have distributed to investors via dividends or share repurchases. That was up 6% from 2018's total, even though the company sold a major pipeline system in Canada.

Kinder Morgan expects to continue generating cash in 2020, with it projecting to produce $5.1 billion even though it sold the rest of its Canadian assets last year. Here's a look at why Kinder Morgan is such a cash flow machine, and what it does with its annual windfall. 

A sheet of $100 bills.

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How Kinder Morgan cashes in on energy

Kinder Morgan is one of the largest energy infrastructure companies in North America. It operates four business segments:

  • Natural gas pipelines (61% of its earnings): It operates the largest natural gas transmission network in the country at 70,000 miles of pipeline. This system moves 40% of all the gas consumed in the country.  
  • Products pipelines (16% of earnings): It's also the largest independent transporter of refined petroleum products in the country, shipping 1.7 million barrels per day through 6,800 miles of pipeline. It also transports crude oil via 3,100 miles of pipeline.
  • Terminals (13% of earnings): It's the largest independent storage terminal operator with 147 locations.
  • Carbon dioxide (10% of earnings): It's the largest transporter of carbon dioxide, which it uses to produce oil out of legacy fields in Texas. 

Kinder Morgan leases space on its assets to customers under long-term, fee-based contracts. About 64% of its revenue has no volume risk, because customers pay it even if they don't use the space.

Meanwhile, another 27% of its income comes from volume-based fees as customers use its infrastructure. Add those two sources together, and about 91% of Kinder Morgan's cash flow comes from predictable fee-based sources.

The other 9% comes from commodity-related activities. However, it has pricing contracts in place that lock in its cash flow on more than half of those activities. That leaves the company with only about 4% of its cash flow exposed to commodity price volatility.

With the bulk of Kinder Morgan's earnings coming from predictable sources, it's able to generate gobs of cash each year as oil and gas flow through its network of pipelines and storage terminals.

A hand counting a stack of $100 bills.

Image source: Getty Images.

What Kinder Morgan does with all its cash

Kinder Morgan allocated its nearly $5 billion of cash flow in 2019 toward two initiatives: The dividend and expansion projects. It paid out $2.2 billion in dividends and financed $2.9 billion of expansion projects, covering the slight shortfall with the proceeds from asset sales. Overall, it sold $1.67 billion in assets last year, the bulk of which it used to pay down debt. 

The company expects to produce another $5.1 billion in cash this year. It plans to pay out about $2.85 billion of that money to investors via its dividend, which implies a 25% increase on a per-share basis.

Meanwhile, it will reinvest the rest to help finance expansion projects, with it expecting to spend $2.4 billion on capital projects this year. It intends to cover the small gap with its strong balance sheet. In the company's view, it still will have about $1.2 billion of additional financial flexibility this year, since its leverage ratio is below its targeted level due to recent asset sales. It could use that money to repurchase shares, invest in additional expansion projects, or save it for a future opportunity. 

A dividend-paying machine

Because Kinder Morgan generates so much stable cash flow, it's able to pay its investors an attractive dividend, which yields around 6% after factoring in the upcoming increase. Meanwhile, the company has plenty of money left over to invest in expansion projects that will push its cash flow higher in the future.

That should allow the pipeline giant to continue returning more money to investors via additional dividend increases and its share repurchase program.