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Kinder Morgan Energy Partners (NYSE:KMP) has a long history in the world of MLPs. It was founded in 1997 when Richard Kinder and William Morgan acquired a small, limited partnership from Enron. The MLP, along with 3 related companies, has become the fourth largest energy company in North America with 80,000 miles of pipelines and 180 terminals. The pipelines transport natural gas, refined petroleum products, crude oil and carbon dioxide (CO2) across the U.S. and out of western Canada. Now there are 4 publicly traded companies with a combined market value of $87 billion:

  • Kinder Morgan, Inc. (NYSE:KMI)
  • Kinder Morgan Energy Partners
  • Kinder Morgan Management (NYSE:KMR)
  • El Paso Pipeline Partners (NYSE:EPB)

Price

Distribution/Dividends

Yield

Kinder Morgan Partners

$79.01

$5.40

6.8%

Kinder Morgan Mgmt

$73.10

$5.40

7.4%

Kinder Morgan Inc

$32.83

$1.64

5.0%

El Paso Pipeline Partners

$33.89

$2.60

7.7%

Kinder Morgan asset map


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Kinder Morgan forecasts the need for more midstream infrastructure to store energy (including natural gas) along with increasing demand for CO2. The Kinder Morgan organization just gave guidance for 2014 and initially it looked pretty good. In 2014, KMP expects $6.4 billion in earnings before DD&A, an increase of $750 million over the 2013 forecast. The companies identified $14.4 billion in capital expenditures which include $1.2 billion in Q4-2013 and $3.4 billion in 2014. Past projections have been conservative.

Kinder Morgan Project Backlog


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However the rest of guidance, highlighted by dividend/distribution projections, did not get a warm reception in the markets.

The best known company is Kinder Morgan Energy Partners , one of the largest pipeline MLPs, with a spectacular record of growth. The 1997 distribution was 94¢ which has grown to $5.40 currently, for an annual compound growth rate of 11.5%. KMR, the matching corporation, has had a 14% compound annual return since the IPO in 2001. Finding any security that can at least match these growth rates is challenging. The 2014 projection is for a distribution of $5.58, 6% above the $5.26 paid in 2013. KMR expects to declare stock dividends based on the $5.58 paid to KMP units.

KMI, a corporation that is the general manager for the 2 MLPs, is in overall command of the operation and the dividend is guided to be $1.72 in 2014. Since the first dividend in 2011, there has been quarter over quarter increases of 1 or 2 pennies. Based on $1.72 rate, average quarterly dividends will be 43¢ in 2014, suggesting lower quarter over quarter increases from 41¢ currently. But the dividend in 2013 would still be 10% above $1.56 paid in 2013.

Growth for KMI in 2014 is expected to be driven by continued strong performance at KMP and contributions from EPB. Growth at KMI will be partially offset by the loss of income from sale of 3 pipeline assets (called dropdowns) to the MLPs and that will allow KMI to return to a nearly pure-play GP.

EPB guidance at $2.60 in 2014 disappointed some investors. The company has raised distributions every quarter since Q1-2008. Current guidance implies that the quarterly distribution will be flattish, averaging 65¢ in 2014 and that matches the Q4 distribution.

EPB's 2014 budget includes the expected purchase (dropdown) from the KMI pipelines. The positive impact from the expected dropdowns at attractive multiples will be largely offset by the impact of the Southern Natural Gas and Wyoming Intestate Company (WIC) rate cases and expected lower rates on contract renewals on the WIC system. In 2014, EPB expects its regulated pipeline and storage assets, along with its LNG business, to generate earnings before DD&A of almost $1.3 billion (adding back EPB's share of joint venture DD&A), an increase of $90 million compared to 2013. EPB also has over $1 billion of expansion projects under contract with customers and that will benefit EPB unit holders in 2016.

Kinder Morgan management has a superb record of growth when many highly regarded companies have delivered limited growth (if that). Cash flow was stable in 2013. At the heart of management forecast is over 80% of cash flow is fee based and 93% is fee based or hedged. Long term annual growth targets for KMP and EPB are 5-6% and 9-10% for KMI.

Management has demonstrated its faith in the future with purchases of KMI stock. Founder and CEO Richard Kinder purchased 500,000 share of KMI in June and again in September, at roughly $35.75 per share. Director Fayez Sarofim purchased 400,000 shares at similar prices in August. Management owns 28% of Kinder Morgan.

This has been a less than spectacular year for MLPs after the Alerian MLP index (AMZ) reached a record in May. Since then the MLP index has been flattish while other yields securities sold off on fears about tapering by the Federal Reserve. Kinder Morgan securities had a worse year shown in the chart below:

Kinder Morgan Partners - Alerian MLP Index (AMZ) - YTD


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I view concerns about 2014 earnings at Kinder Morgan as not long lasting. Future growth will come from the growing energy business which Kinder Morgan is a large, active participant.

There has been a substantial energy boom in the U.S. It is highlighted by the highest oil production in a quarter-century driven by shale drilling boom in Texas and North Dakota which reduces the need for foreign imports. The Energy Information Administration (EIA) said oil output grew 18% in the past 12 months (the fastest pace on record). Currently Russia is the largest producer with over 10 million barrels per day (bbl/day), Saudi Arabia is in second place with 9½ bbl/day and the U.S. is third place with over 8 million bbl/day. Including all energy sources (natural gas, petroleum, nuclear and renewables) the US met 86% of its energy needs in the first 8 months of 2013, the biggest increase since 1986.

Kinder Morgan business has continued to grow even with 2 significant recessions in the last 13 years. It will keep growing as a principal supplier of infrastructure for the energy boom in the U.S. and Canada. EPB carries the greatest risk going into 2014 because of an apparent slowdown in distribution growth and it has only been under Kinder Morgan control for a short time. But the higher yield of 7.7% will reward venturesome investors. Some of that risk bleeds through to KMI, the general partner which shares in the profit, and that stock has a relatively high yield of 5%.

Meanwhile KMP and KMR are on track to continue rewarding owners. The yields of roughly 7% will feel good whatever difficulties may lie ahead in the markets. Underlying strength for any security is the business model and midstream MLPs will be major participants in the growing US energy market. Being an MLP leader, Kinder Morgan will continue increasing earnings so it can extend raising dividends/distributions. When distributions/dividends rise, security prices will follow.

Source: High Yields At Kinder Morgan Are Rewards For Patient Investors