There's a lot of uncertainty about the future for fossil fuel-focused companies like Kinder Morgan (NYSE:KMI) as the global economy switches to cleaner fuel sources. What's clear right now is that those legacy fuels remain in high demand. That was evident in the company's third-quarter results.
That's giving it funds and the time to find the right opportunities to transition its business, which it has also started doing this year. Here's a closer look at the quarter and what Kinder Morgan sees ahead.
A cash cow
Kinder Morgan's energy infrastructure assets continue to generate steady cash flow supported primarily by long-term contracts with oil and gas companies and utilities. The company produced $1.013 billion, or $0.44 per share, of distributable cash flow during the third quarter. That's about $72 million, or $0.04 per share, below the year-ago period.
Still, that was enough money to cover Kinder Morgan's dividend -- which currently yields 5.8% -- with nearly $400 million to spare even though it increased the payout by 3% over the past year. That gave Kinder Morgan the free cash flow to continue expanding its business.
Overall, Kinder Morgan delivered steady results across all four of its business segments. Earnings at its biggest division, natural gas pipelines, was flat year over year, as were its carbon dioxide operations. Meanwhile, the growth in products pipelines offset declining earnings in its terminal operations.
While its natural gas segment delivered flat results in the period, CEO Steve Kean noted that Kinder Morgan "continue(s) to benefit from growing global natural gas demand." He pointed out that its strategic position allows it to serve domestic and export markets, including LNG and shipments to Mexico. Meanwhile, its large-scale gas storage business enables it to move gas across the country wherever it's needed most, including during extreme weather events or to offset the intermittency of renewable power generation.
With that solid showing in the third quarter, Kinder Morgan has now produced $4.367 billion of cash year to date, up 30% from 2020's level. That's due to a monster first quarter when it benefited from the impact winter storms in Texas had on the natural gas market.
A look at what's ahead for Kinder Morgan
Kinder Morgan's results thus far have the company on track to generate $5.4 billion of cash this year. It also expects to produce $7.9 billion of adjusted EBITDA. That has it on pace to end the year with a conservative leverage ratio of 4 times debt-to-adjusted EBITDA.
Looking further ahead, Kinder Morgan has been working to position its business for the future. One step it took was forming a new energy ventures business unit earlier this year. That segment closed its first acquisition in August, acquiring Kinetrex Energy for $310 million. Kinetrex Energy operates LNG and renewable natural gas (RNG) assets. It recently started construction on three new landfill-based RNG facilities. Kinder Morgan expects to invest $146 million into the projects, which should be operational by the end of 2022r. Once complete, this business will have four sites capable of producing 4 billion cubic feet of RNG per year.
Meanwhile, Kinder Morgan continues to find new ways to utilize its existing assets to store and transport cleaner alternative fuels. For example, it's developing new renewable diesel hubs in California. It's investing $23 million to build one hub at an existing terminal in Northern California that should start service in 2023. In addition, it's working to develop another one in Southern California that will repurpose an existing products pipeline for renewable diesel. The company also announced a partnership with Neste to create a premier domestic raw material and logistics hub. The $65 million project will store raw materials like cooking oil and should start service by early 2023.
These investments demonstrate that Kinder Morgan can play an essential role in the energy market in the future. It can repurpose existing assets to transport and store cleaner alternative fuels while building new ones to support the growth of clean energy sources. While these are smaller investments, they could pay big dividends in the future as demand for these fuels grows.
A cash flow machine
Kinder Morgan's legacy energy infrastructure operations continue to generate mounts of cash. That gives the company the funds to pay an attractive dividend and invest in new projects. Increasingly, the company is investing in infrastructure to support the fuels of the future. That should enable Kinder Morgan to continue generating a lot of cash to pay a steadily growing dividend.