Why Kinder Morgan Energy Is A Compelling Prospect?

| About: Kinder Morgan (KMP)

In order to consolidate its leading position in the country further, Kinder Morgan Energy Partners (KMP) has undertaken the BOSTCO terminal project. This project is a joint venture between Kinder Morgan and TransMontaigne Partners (TLP). Kinder Morgan has a 55% ownership in this project and TransMontaigne owns the remaining 45% interest. Located on the Houston Ship Channel, this nearly $500 million project is capable of handling ultra-low sulfur diesel, residual fuels, and other black oil terminal services. Phase one of the project was pressed into service last year and has a capacity of handling 6.5 million barrels. 31 of the 51 storage tanks have begun service, and the remaining tanks will be operational in the first half of this year.

Phase two of the project was previously expected to be pressed into service in the fourth quarter of 2014. However, work on the project has progressed better than expected, and phase two of the project is expected to be operational in the third quarter of 2014. Completion of this phase will ramp up the handling capacity of the BOSTCO project to 7.1 million barrels and 57 storage tanks. This terminal is already fully subscribed for the total 7.1 million barrel capacity. Additionally, the phase two project is capable of adding another 3 million barrels of liquids handling capacity in case of increasing demand for storage capacity. Such an addition would increase the BOSTCO project handling capacity beyond 10 million barrels. Thus, the completion of the BOSTCO terminal project can add an approximate 5% to Kinder Morgan's 112 million barrel liquids handling capacity. Earlier than forecasted completion of the project, also means that Kinder Morgan can raise the capacity at the terminal this year since the overall project capacity is already subscribed.

Other features of the phase two project include augmentation of pipeline capacity and the provision of high-speed loading at the rate of 25,000 barrels per hour. The BOSTCO project is under Kinder Morgan's terminals segment. This segment contributed more than 14% of the company's earnings in 2013. Additionally, the first distribution from this project is expected to be received in the first quarter of this year. The distributions from this project are expected to increase over the next quarters with the addition of storage tanks. So, this project can be expected to be accretive to the first distributable cash flow for Kinder Morgan in the first quarter this year and beyond.

Improving yield

Kinder Morgan has increased its quarterly cash distribution to $1.36 per unit for the fourth quarter of 2013, up 5% from the $1.29 per unit paid in the fourth quarter of 2012. The original budgeted cash distribution for 2013 was $5.28 per unit, and with the latest distribution increase, the annualized dividend is $5.33 per unit, exceeding the company's guidance by $0.05. Kinder Morgan's distribution history over the last 17 years is shown below:

Kinder Morgan's distribution per unit has increased at a compounded annual rate of 13% in the last 17 years. The company has increased its distribution 50 times in the last 17 years, which indicates the company's healthy appetite for growing distributions. It looks solid from the dividend yield perspective as well, yielding 6.7% at the current market price.

For companies with robust cash distributions, sustainability of the distributions or the distribution coverage ratio, or DCR, is an important metric to consider. In an ideal situation, the DCR should be greater than or equal to 1. In the fourth quarter of 2013, Kinder Morgan's DCR was 1.06, and a DCR of 1.01 for the full year, despite the distribution increase, shows the company's intent and ability to reward investors with increasing distributions. Additionally, a yield of 6.7% is more than twice the yield on a 10-year U.S. Treasury bond, which compensates the investors well, even in the absence of capital appreciation.

Two more companies that look promising from the perspective of high dividend yield and sustainability of distributions are Energy Transfer Partners (ETP) and Plains All American (PAA). The forward dividend yield for Energy Transfer at the current price is 6.8%, which is the highest among these three dividend players. Energy Transfer had a stagnant distribution per unit for a long time but shifting to a fee-based model from an energy sales model has helped the company's operations. This allowed the company to raise its distribution to $0.905 in the third quarter of 2013. For the nine months ending in September, Energy Transfer had a DCR of 1.02, an improvement from the previous figure of 0.93 in the corresponding period in 2012. This is a healthy sign for the company's future prospects.

Plains All American also has a high dividend yield of 4.8%, although it's not quite in the same league as the other two companies. However, when sustainability of the distributions is in question, Plains All comes out the winner with a DCR of 1.39 for the first nine months of 2013. It improved its quarterly cash distribution to $0.615 per unit, an increase of 2.5% over the quarterly distribution of $0.60 in November 2013. Plains All has increased its quarterly cash distributions for 37 of the previous 39 quarters and for the past 18 consecutive quarters. The company has a target of increasing its quarterly distribution in November this year by 10% over the quarterly distribution paid last year. This looks tempting for income investors seeking a steadily growing income stream.


With so many Master Limited Partnerships, or MLPs, available in the oil and gas sector, investors can be in for a challenge when called upon to make a choice, and with many MLPs offering high dividend yields it is even more challenging. However, with high dividend yielding stocks, investors should consider the dividend growth and the DCR to ascertain the future sustainability of the distributions. The three stocks discussed above meet the criteria and are worth considering for investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.