Insights: Indiana | Business Spotlight | Spring 2018

Kinetrex: Investing in liquified natural gas

Kinetrex Energy is changing the way that companies fuel their businesses

Aaron Johnson, president and CEO, Kinetrex Energy
By Emily Delzell

Inside its two Indiana plants, each with 1 billion cubic feet of ultra-cold storage, Kinetrex Energy converts as much as 250,000 gallons of liquefied natural gas (LNG) a day through a complex process of compressing, cooling and condensing methane to −265°F (−160°C). At that stage, it’s liquid, 600 times denser than in its vapor state, and ready for tanker delivery to businesses without access to a natural gas pipeline or those that want an alternative to diesel, oil, and propane.

“We make natural gas mobile,” says Aaron Johnson, president and CEO of Indianapolis-based Kinetrex Energy. “Our interstate trucking ‘pipeline’ brings an alternative energy source to conventional pipeline-constricted areas that haven’t traditionally had many energy options.”

Kinetrex’s Midwest location (its plants are in Indianapolis and Beech Grove, Indiana) is at the center of a four-pipeline natural gas hub and within a day’s drive of 65 percent of the U.S. population. In addition to LNG, the company provides traditional pipeline natural gas to large commercial and industrial customers, and markets renewable natural gas (RNG), an alternative fuel made by cleaning and converting waste gas collected from landfills, livestock operations and wastewater treatment facilities into liquid.

To make the switch to liquid or renewable natural gas, businesses need to make significant capital investments, says Johnson. But the return on that investment is fuels that are cheaper and greener than traditional energy sources.

Liquefied natural gas, for example, costs 60 percent less and produces 20 percent fewer emissions, including 90 percent fewer greenhouse gas emissions, than diesel, according to Johnson. And the Department of Energy estimates that, overall, the use of natural gas reduces greenhouse gas emissions by 6 to 11 percent.

“Kinetrex’s products provide the mythical win-win scenario,” Johnson says. “A truck fleet wanting to convert can see a positive economic payoff with LNG, versus using diesel, within three years. In addition to making economic sense, it’s cleaner for the environment and can help organizations reach corporate sustainability goals and meet federal regulations.”

RNG, for example, qualifies as an advanced biofuel under the federal renewable fuel standard, according to the Department of Energy. The standard requires certain industries to blend renewable energy sources into their transportation fuel in increasing amounts each year, escalating to 36 billion gallons by 2022.

Out-of-the-gate success

With its innovative fuel products and what Johnson describes as a “very strategic, methodical, market-focused process from the beginning,” Kinetrex has been profitable since its first month of operation, in July 2013.

The company got its start as a subsidiary of Indianapolis natural gas utility Citizens Energy Group, where Johnson and others in the strategy and corporate development group saw a need for LNG in the industry and transportation sectors.

Kinetrex’s Midwest location (its plants are in Indianapolis and Beech Grove, Indiana) is at the center of a four-pipeline natural gas hub and within a day’s drive of 65 percent of the U.S. population. (Photography by Rob Banayote)

“Our strategy was less focused on numbers and more on how we would hit and attack our markets, and then the game plan for making it happen,” he says. “There was lot of hard team work and good luck in quickly bringing in excellent customers.”

These customers included a delivery giant which came on board almost immediately after the 2013 startup with a large financial and philosophical commitment to cleaner, less costly energy.

Since then, that company has invested more than $50 million in LNG transportation and fueling infrastructure for the delivery company, and more than 1,000 vehicles now run on Kinetrex fuel.

After a running start, Kinetrex encountered challenges when global crude oil prices began to drop, falling from more than $100 per barrel in the company’s early days to less than $30 a barrel by January 2016.

“We saw this huge erosion in the competitive advantage we’d started out with when competing in the on-highway transportation market in which a lot of companies were having their budgets blown out by the high price of diesel fuel,” says Johnson. “All of a sudden, the price of oil became a back-burner issue.”

"Our strategy was less focused on numbers and more on how we would hit and attack our markets, and then the game plan for making it happen.”
— Aaron Johnson, president and CEO, Kinetrex Energy

Creating new revenue streams

Falling oil prices meant Kinetrex needed to make its operations more efficient and to move into new markets that didn’t require competing on constantly fluctuating economics. One of those markets was the agricultural sector, much of which is powered by propane, not diesel.

Huntington, which joined forces with Kinetrex in 2016 when the energy company became a subsidiary of the Vancouver, Canada-based private equity firm Parallel49 Equity, has been invaluable in the company’s move into new markets, says Johnson.

“Huntington saw our company’s vision and has been very interested from the beginning, not just in having that initial loan in place, for example, but also in seeing what else we can do together,” says Johnson.

That relationship is critical, says Johnson as conversions to liquefied natural gas begin in the seven figures.

“Having a bank that can help facilitate our customers’ needs, as well as our own, has greatly expanded our ability to expand, to pivot when we need to, and to make some of the additional investments that we’ve needed to make,” he says. I can’t overstate how huge a role they’ve played in our success.”

Today, Kinetrex’s growth continues. A number of grain driers in the region have made the switch from propane to Kinetrex LNG, and the company recently landed a major agricultural player in the nation’s second-largest egg producer.

Aaron Johnson, president and CEO, Kinetrex Energy
Aaron Johnson, president and CEO, Kinetrex Energy (Photogrpahy by Rob Banayote)

Into the future

Going forward, Kinetrex will continue to open new markets for its products and look for opportunities to deepen its success in sectors that already use its fuels, including on-highway transportation, agriculture, power generation, asphalt production, exploration and production, and the mining, rail, and marine industries.

Kinetrex has recently beefed up its marketing department and is looking to gain ground in the transportation industry. “Some major players in the engine industry are putting out new natural gas engines that I think the market is going to get really excited about, so we’re making a heavy push there,” says Johnson, adding that several Fortune 50 companies are considering trucking fleet conversions so they can add Kinetrex’s fuels to their energy mix.

“Each year, or as otherwise has been necessary, we do a methodical review of our strategy, so we’re constantly reviewing, adapting and making tweaks. Ninety-nine percent of that focus is qualitative,” he says. “That process allows us to be open and honest about what’s working and what’s not. So, we’re zigzagging the boat, if you will, but we’re always heading in a northerly direction. I think having that robust planning and ability to pivot has been a huge part of our success.”

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