Electricity demand in the U.S. has grown at a rather meager rate of around 0.5% annually over the past couple of decades. However, the country is about to stomp on the gas. Forecasters predict that power demand will grow by 2% to 4% annually through 2030 on average. AI data centers are a big driver of this acceleration because they consume tremendous amounts of power.
While most data center operators want to power their facilities with renewable energy, it can't meet all this demand on its own. That provides an opportunity for natural gas to fill the gap. Because of that, pipeline companies like Energy Transfer(NYSE: ET) and Kinder Morgan(NYSE: KMI) could see high-octane growth in the coming years as they work to supply utilities and data center operators with more gas. That could give them more fuel to grow their high-yielding dividends.
Massive incremental demand potential
Energy Transfer is one of the country's largest energy midstream service providers. It operates an extensive gas pipeline network. Its pipes currently transport gas to 185 power plants either directly or via indirect connections.
The company is already starting to capitalize on the uptick in demand for gas by power plants. It has signed deals to provide an additional 500,000 MMBtu/d (million BTUs per day) of gas over the past two years. That's only a fraction of the incremental demand it's seeking to satisfy. The company is pursuing expansions at currently connected gas plants to supply them with over 1 billion cubic feet per day (Bcf/d) of gas. In addition, it's in discussions with power plants with new connections that could consume over 5 Bcf/d. On top of that, it's in talks with data center customers that includes more than 3 Bcf/d of potential new demand.
This incremental demand will enable the company to utilize available capacity across its existing footprint and build new pipelines. It should also have more opportunities to expand its natural gas gathering and processing capacity to support higher gas production volumes.
Growing gas volumes would enable the pipeline company to generate more fee-based income to support its growing cash distributions to investors. The master limited partnershipcurrently expects to increase its distribution, which yields nearly 8%, by 3% to 5% per year. Accelerating gas demand could enable the company to grow its payout at or potentially above the high end of its range in the coming years. Even at the low end, Energy Transfer could produce double-digit total annualized returns.
Already cashing in on the boom
Kinder Morgan operates the country's largest natural gas transmission network. It has about 66,000 miles of pipelines that transport more than 40% of the country's gas production. It also has an extensive gas storage operation, with 15% of the country's total capacity. Kinder Morgan gets about 64% of its cash flow from gas-related services, which is more than any other U.S. midstream company.
The company's base case is that the U.S. will see 3 to 6 Bcf/d of incremental demand from power companies by 2030 to support data centers. Meanwhile, it sees a potential upside of over 10 Bcf/d. That will fuel the need for a lot more natural gas pipeline capacity in the coming years.
Kinder Morgan is already starting to capture some of these expansion opportunities. The company and its utility partner, Southern Company, recently agreed to expand the Southern Natural Gas pipeline's South Line by about 1.2 Bcf/d. The $3 billion project, $1.7 billion of which Kinder Morgan will finance, will help meet growing power generation and local distribution demand in the Southeast when it comes online in late 2028.
That project is part of the company's $5.2 billion expansion backlog, most of which supports natural gas. Those projects will help grow Kinder Morgan's cash flow, which should allow it to continue increasing its dividend. The company has raised its payout, which yields more than 5%, for seven straight years, including by 2% earlier this year. It could potentially grow its dividend at an accelerated rate in the future if demand growth materializes as expected.
Collect a growing gas-powered income stream
As operators of two of the country's largest gas pipeline networks, Energy Transfer and Kinder Morgan should benefit from the expected acceleration in gas demand powered by AI data centers. It should a;sp provide them with more opportunities to expand their operations, which would give them more fuel to grow their high-yielding dividends. That makes them lower-risk ways to cash in on the AI boom.
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Matt DiLallo has positions in Energy Transfer and Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
