Kinder Morgan Energy Partners (KMP) is one of the biggest Master Limited Partnerships in the energy sector. The company operates more than 37,000 miles of natural gas and petroleum product pipelines and owns 180 bulk terminals and rail transloading facilities with 200 million barrels of storage capacity. Kinder Morgan Inc (KMI) owns about 13% of KMP, and through its Kinder Morgan Management (KMR), acts as general partner.
KMP is very attractive to investors due to its generous cash distributions. The company has been increasing cash distributions on a consistent basis. As a result, a number of investors hold KMP in their income portfolios. Personally, I believe KMP is the best pick in the energy sector Master Limited Partnerships. The partnership has a strong business model and immense presence in the market. I take a look at the growth in distributable cash flows, valuation and future growth prospects.
Growth in Revenue and Distributable Cash Flow
KMP has experienced impressive revenue growth over the past four years. Revenue for KMP has grown at an average of 7.26% over the past four years. Furthermore, operating income has followed the trend in revenue and grown at an impressive rate. Over the past four years, operating income has grown at an average of almost 18%. At the end of the last year, the partnership charged losses of $669 million from discontinued operations (Interstate gas transmission line, Trailblazer gas pipeline and Casper and Douglas gas processing operations etc.). As a result, limited partner's interest showed a loss of $1.86 per unit from discontinued operations, and net loss per unit stood at $0.22. However, losses from discontinued operations are usually excluded from earnings by analysts in order to analyze the core operations of the business.
While growth in revenue and operating income has been impressive for KMP, the most important metric for an MLP is distributable cash flow per unit. At the moment, distributable cash flows stand at $1,778 million, up from $1,360 million at the end of 2010. Over the past three years, distributable cash flows have grown at an average rate of 10.25%. Table below shows distributable cash flows over the past three years.
Distributable cash flows
Weighted Average units for Limited Partners
Distributable cash Per unit
Source: SEC Filings
Distributable cash flows have grown at an impressive rate for the partnership, and currently it stands at $5.07 per unit. Per unit cash distributions for 2012 stood at $4.98 for KMP, which shows that there is enough growth in per unit distributable cash flows to cover the increase in per unit cash distributions.
Valuation and Future Growth Prospects
Based on price multiples, the units of KMP look a bit pricey. However, due to an impressive growth in cash flows and strong business, the partnership has been an extremely attractive investment. As a result, there is some premium attached to an investment in KMP. Nonetheless, I believe KMP can be a great pick due to its potential total return. At the moment, the partnership offers a yield of about 5.8% with a solid chance of increase in cash distributions in the future.
On the other hand, KMI being the general partner has dropped down significant assets to increase cash flows of the partnership. Recently, KMP increased the stake in El Paso Natural Gas Pipeline and Midstream Assets. KMP paid eight times EBITDA of 2013 to purchase the assets, and approximately $110 million worth of units were issued to KMI. Remaining amount of the transaction was paid in cash. KMI will use the cash to pay down some of the debt associated with the acquisition of El Paso Corporation.
In my opinion, KMP is the best energy sector Partnership. There are very few partnerships that can show such growth figures in income and distributable cash flows. The partnership operates one of the biggest networks of pipelines in the country. As a result of the recent acquisition of El Paso pipeline; I expect distributable cash flows of the partnership to further improve. Furthermore, the partnership has an extremely impressive portfolio of assets, which is certain to support the future growth. Commodity prices will likely be under less pressure than the previous year. As a result, revenue for the partnership will improve. In my opinion, KMP is the best among energy MLPs, and it will be a solid addition to any income portfolio.