Kinder Morgan Is Now Covering Cash Dividends Paid with Free Cash Flow

Image: Kinder Morgan’s shares have been on a tear after the midstream energy giant reports healthier free cash flow that covers cash dividends paid.

By Brian Nelson, CFA

On January 22, Kinder Morgan (KMI) reported fourth quarter results that missed the consensus forecast for both the top and bottom lines. Adjusted EBITDA in the quarter of $2.1 billion was 7% higher on a year-over-year basis, while net income attributable to Kinder Morgan came in at $667 million, up from $594 million in the year-ago period. Adjusted earnings per share was $0.32 in the quarter, up 14% compared to the fourth quarter of 2023. The company approved a cash dividend of $0.2875 per share for the fourth quarter, which is a 2% increase over the fourth quarter of 2023.

Management had a lot to say about the quarter:

The company enjoyed another exceptional quarter, with very strong operational and financial performance. We continued to internally fund high-quality capital projects while generating cash flow from operations of $1.5 billion and $0.7 billion in free cash flow (FCF) after capital expenditures. With robust market fundamentals and a new Administration committed to expediting energy infrastructure projects, the future looks bright.

KMI had a very strong fourth quarter on increased financial contributions from our Natural Gas Pipelines, Products Pipelines and Terminals business segments, with Adjusted EBITDA up 7% versus the fourth quarter of 2023. Our balance sheet remains healthy, as we ended the year with a Net Debt-to-Adjusted EBITDA ratio of 4.0 times.

We are also today announcing the Trident Intrastate Pipeline Project, an approximately 216-mile pipeline build underpinned by long-term contracts that will provide approximately 1.5 billion cubic feet per day (Bcf/d) of capacity from Katy, Texas to the LNG and industrial corridor near Port Arthur, Texas.

Further, during the quarter we secured additional long-term, binding transportation agreements on our previously announced Mississippi Crossing Project, resulting in a current project subscription of approximately 1.8 Bcf/d. The estimated $1.6 billion project is now designed to transport up to 2.1 Bcf/d of natural gas through the construction of nearly 206 miles of 42-inch and 36-inch pipeline and three new compressor stations.

For several quarters now, we have pointed to expected significant new natural gas demand for LNG, power plants, and emerging opportunities such as artificial intelligence operations, cryptocurrency mining, data centers and industrial re-shoring. These expectations are being realized. Our commercial teams have secured contracts to underpin three large natural gas projects – South System Expansion 4, Mississippi Crossing and Trident, totaling approximately $5 billion (KM share) in project costs. These projects are all progressing and are expected to contribute to significant future growth once in service.

Our project backlog also reflects this strong natural gas demand. At the end of the fourth quarter of 2024, the backlog stood at $8.1 billion, a nearly 60% increase compared to $5.1 billion in the third quarter of 2024. Natural gas projects account for approximately 89% of the backlog. In calculating backlog Project EBITDA multiples, we exclude both the capital and EBITDA from our CO2 enhanced oil recovery projects and our gathering and processing projects, where first full year multiples are more favorable but the earnings are more uneven than with our other business segments. We expect the remaining $7.0 billion of projects in the backlog, when realized, to generate an aggregate first full year Project EBITDA multiple of approximately 5.8 times (up 0.4 times versus the previous quarter).

Kinder Morgan is doing a much better job covering dividends with traditional free cash flow these days. For the three months ended December 31, 2024, cash flow from operations was $1.51 billion, with capital expenditures coming in at $772 million, resulting in free cash flow of $738 million, which was in excess of the company’s cash dividends paid of $642 million in the quarter. For the year ended December 31, 2024, free cash flow was $3 billion, which was in excess of cash dividends paid of $2.6 billion, resulting in free cash flow after cash dividends paid of $449 million. 

Looking to 2025, Kinder Morgan is targeting adjusted EBITDA of $8.3 billion, up 4% from 2024, while it plans to end 2025 with a net debt-to-adjusted EBITDA ratio of 3.8 times. Net income attributable to Kinder Morgan is expected at $2.8 billion for the year, up 8% versus 2024, while adjusted earnings is targeted at $1.27, up 10% from 2024. Management plans to declare dividends of $1.17 per share for 2025, which is a 2% increase from the dividends declared in 2024. Shares yield 3.8% at the time of this writing.

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