Kinder Morgan Is Investing $1.1 Billion to Turn Trash Into Cash

Kinder Morgan (KMI 2.53%) can see the writing on the proverbial wall. The global economy is rapidly shifting toward cleaner alternative energy solutions to ward off the potentially devastating effects of climate change. That leaves the fossil fuel-focused infrastructure company with two options. It can put its head in the sand and ignore this shift, or it can change with the rest of the world.

The pipeline company chose the latter option. It formed a new energy transition ventures group last year to identify, analyze, and pursue commercial opportunities from the transition to lower carbon energy sources. That business unit hit the ground running, making three acquisitions aimed at turning methane produced at landfills into renewable natural gas (RNG). The company expects these investments to turn trash into cash and support its 6%-yielding dividend. 

Building out a large-scale RNG portfolio

Kinder Morgan launched its RNG business last year by purchasing Kinetrex Energy for $310 million. It owned two small-scale domestic liquified natural gas (LNG) production and fueling facilities, a 50% interest in a landfill RNG facility, and three more landfill-based RNG facilities under development, all located in Indiana. Kinder Morgan has since started construction on those three facilities at landfills owned by WM (WM -0.52%). It's investing $146 million on those projects, which it expects will start entering commercial service this fall. Once operational, the four Kinetrex Energy facilities will produce 4 billion cubic feet (Bcf) of RNG per year by capturing methane produced from the decomposition of organic waste at the landfills. 

Kinder Morgan enhanced its landfill gas business in July by purchasing three landfill assets in Texas and Louisiana from Mas CanAm for $355 million. The deal included the Arlington RNG facility that should produce 1.4 Bcf of RNG next year, with the potential to grow significantly in the future. 

The company closed its latest deal this month. It bought North American Natural Resources for $135 million, which owns seven landfill gas-to-power facilities in Michigan and Kentucky. Kinder Morgan plans to invest an additional $175 million to convert four plants into RNG facilities. Once complete, they could produce 2 Bcf of RNG a year when they enter service in early 2024. 

A billion-dollar bet on trash

All totaled, Kinder Morgan is investing $1.1 billion to build out its RNG business, which will have the capacity to produce 7.7 Bcf by 2024 when all the facilities enter service. It will also have three other facilities producing renewable electricity. 

The company expects this investment will pay dividends in the coming years. It has long-term contracts to sell the RNG produced at these facilities to customers primarily in the transportation market. The sales will also generate Renewable Identification Numbers (RINs) that the company can sell to refiners. Kinder Morgan therefore estimates it's paying less than six times 2024 earnings before interest, taxes, depreciation, and amortization (EBITDA) on its $1.1 billion investment. This valuation multiple implies the business should generate roughly $185 million of annual EBITDA once all the facilities are online. That will provide the company with some incremental income, though given that it already generates $7.2 billion of annual EBITDA, it won't move the needle too much.

However, these investments are probably only the beginning. Hundreds of landfills across the county are candidates for producing RNG, and WoodMac forecasts that the country's RNG production from landfills will grow from 0.2 billion Bcf per day last year to as much as 3.2 Bcf per day by 2049. That could give Kinder Morgan many more opportunities to expand its RNG business.

Given this sizable growth opportunity, Kinder Morgan isn't the only company spending big money to capitalize on landfill gas. Leading collections and landfill company WM unveiled plans to invest $825 million through 2025 to grow its RNG business. The company is building 17 new RNG projects over the next several years, which will boost its RNG production by 600%, enabling WM to fuel its entire fleet by 2026. 

Turning to trash to fuel the dividend

Kinder Morgan is making a big bet on RNG because that investment can generate a solid return. Meanwhile, its initial investments to build an RNG platform position it to capitalize on the sector's enormous upside potential. It could become a more meaningful growth driver over the coming years, potentially giving Kinder Morgan the fuel to continue increasing its high-yielding dividend.