Kinder Morgan Just Locked In a $5 Billion Pipeline Deal. Here's What It Means for KMI's Dividend.

Kinder Morgan (NYSE: KMI), Phillips 66 (NYSE: PSX), and HF Sinclair (NYSE: DINO) just finalized a joint venture (JV) and made a final investment decision to build the Western Gateway Pipeline System. Valued at $5 billion, the 1,300-mile Western Gateway system will move refined petroleum products from refineries in the central U.S. and Gulf Coast regions to West Coast and Southwest markets.

Kinder Morgan will own 35.1% of the system, backed by long-term contracts that will generate steady cash flow. This project should give the pipeline stock more fuel to grow its 3.8%-yielding dividend.

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A win-win-win partnership

Kinder Morgan, Phillips 66, and HF Sinclair are teaming up to build a new pipeline system to enhance fuel supply reliability to Western U.S. markets. Kinder Morgan will contribute its existing SFPP East Line pipeline from El Paso, Texas, to Phoenix, Arizona, and its SFPP West Line pipeline from Colton, California, to Phoenix, which it will reverse to move refined products east to west into California. In addition to contributing these pipelines (valued at $1.5 billion), Kinder Morgan will contribute $250 million to the JV.

Phillips 66, which will own 49.9% of the JV, will build a new 900-mile pipeline from Borger, Texas, to Phoenix. The refining and midstream giant will contribute $2.5 billion in cash to the JV. Finally, HF Sinclar will contribute $750 million to the JV.

The companies expect to complete Western Gateway in 2029. The pipeline will initially have a capacity of 230,000 barrels per day and can be expanded in the future without the need for additional pipe.

Stable cash flows to support the dividend

Underpinning Western Gateway are primarily 10-year, take-or-pay contracts. This contract structure means Kinder Morgan and its JV partners get paid regardless of whether customers ship volumes on the pipeline. As a result, it will provide the company with very durable cash flows, which is ideal for supporting its dividend. Take-or-pay contracts currently provide 65% of its cash flow, with most of the rest coming from steady fee-based sources (26%) or commodity price hedges (5%).

In commenting on its investment in the announcement press release, CEO Kim Dang noted that the company expects to "earn attractive returns on our investment based on the incremental project earnings above those of our contributed assets." That implies it will generate incremental, highly visible cash flows to bolster its already stable cash flow base from a relatively modest additional investment ($250 million).

The incremental stable cash flows of Western Gateway should support Kinder Morgan's ability to continue growing its dividend in 2029 and beyond. The company has increased its high-yielding payout for nine straight years. Kinder Morgan has significant visible growth ahead, with $9.6 billion in growth capital projects in its backlog at the end of the second quarter, with expected in-service dates through mid-2030. Most of those projects are gas pipelines ($8.8 billion), so Western Gateway will provide some additional diversification to its growth profile.

Adding to the dividend's long-term appeal

Kinder Morgan is layering in another long-term growth driver by sealing a deal to participate in the massive Western Gateway project. It will provide another incremental source of stable cash flows for the pipeline giant. That will support its ability to continue growing its high-yielding dividend, enhancing its appeal to income-seeking investors.

Matt DiLallo has positions in Kinder Morgan and Phillips 66. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Phillips 66. The Motley Fool has a disclosure policy.