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Since our last run in with Kinder Morgan Energy Partners (NYSE:KMP) back in May, the stock is relatively flat. However, its robust 6.4% dividend yield is still in play.

Back in May, we noted that...

Kinder Morgan had increased the quarterly distribution forty-seven times since the current management team took over in February of 1997...their dividend yield of 6%, with good organic growth rates and a solid return on equity makes Kinder Morgan a solid play.

This is still the status quo of our thesis.

Quick overview

KMP is one of the largest master limited partnerships (MLPs) around. The company operates as a pipeline transportation and energy storage company in North America. Its five segments include Products Pipeline (17.6% of earnings), which has 8,600 miles of refined petroleum products pipelines. Its major segment is Natural Gas Pipelines (33.9%), having 33,000 miles of natural gas transmission pipelines and gathering lines. CO2 Pipelines (26.8%) produces and transports via 1,500 miles of pipelines. The Terminals (16.5%) include 110 plus liquids and bulk terminal facilities. The final segment is Kinder Morgan Canada (5.2%) and includes transporting crude oil and refined petroleum products through over 2,500 miles of pipelines.

The latest

  • Since the start of the year, KMP is down 0.26%. KMP flirted with $92 per share in April, but has bounced around quite a bit this year with a low of around $81.
  • There has not been much action from the front line of KMP, it's pretty much been business as usual with the recent headlines being a refinancing agreement and cleaning up some acquisitions from earlier in the year.
  • KMP ha a $14 billion backlog, which includes the expansion of its Trans Mountain pipeline, increasing gas exports to Mexico, and developing various terminals.

For 2Q, KMP posted earnings per unit of $0.49, over 30% above the $0.37 the company posted in 2Q 2012. Revenues were up an impressive 50% year over year. Revenues were up 50.1% to $3,017.0 million and the key, quarterly cash distribution, was upped to$1.32, 7% year over year growth. Since '97, the company has upped its quarterly distribution 48 times. At the end of the quarter, distributable cash flow $505 million, compared to $366 million in the comparable quarter last year.

Digging deeper into its segments. Products pipelines saw 8% year-over-year growth in earnings before D&A, thanks to higher Transmix volumes. The natural gas pipelines saw earnings before D&A up 137.8% YoY to $566 million -- driving this growth was benefits from the El Paso acquisition. CO2 saw earnings before D&A up 10% year over year. Terminals saw 5% YoY earnings before D&A growth and Kinder Morgan Canada was essentially flat.

KMP plans to invest some $11 billion in organic projects through 2015. A couple notable projects include the Trans Mountain expansion project, the BOTSCO terminal, and the Galena Condensate Processing facility. Other projects include the conversion of a portion of EPNG to move crude from Permian to California, as well as a pipeline to service Florida Power and Light.

Let's not forget about the key El Paso acquisition. The benefits to KMP is that the company will see sales dropped down from its parent Kinder Morgan Inc. Overall, this will greatly increase its natural gas footprint -- putting KMP as the largest pipeline company in the U.S.

All in all

KMP is still a buy. Here's the deal, according to the EIA, midstream facilities (which includes pipelines, storage, processing, etc) are expected to grow by $10 billion per year over the next 15 to 25 years. This growth is just to cover the unexpected production growth the domestic U.S. has experienced and will continue to experience through the Permian, Eagle Ford, Bakken, Utica, Marcellus, and Mississippian plays.

In addition to that, CO2-EOR projects are popping up around the country and reviving old fields to prominent production. There is no one that has a domestic footprint in the midstream market like KMP, so there is no one better positioned to benefit, immediately, without much more CapEx or operating expenses as domestic production grows. It will also be a good chance for selective or aggressive growth for KMP, as they look to continue their impressive streak of increased annual unit distributions.

Source: Kinder Morgan: Still A Dividend Machine