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Increase of about 8% in the current year dividends compared to last year.

Robust growth in business segments will support future growth in dividends.

The company is trying to be a pure-play general partner by dropping down its assets to its partnerships.

Kinder Morgan Inc (NYSE:KMI) is the largest midstream and the third largest energy company in the North America with a combined enterprise value of approximately $110 billion. The company owns and manages a diversified portfolio of energy transportation and storage assets. The two major segments of the company that drive its growth in cash dividends are Kinder Morgan Energy Partners (NYSE:KMP) and El Paso Pipeline Partners (NYSE:EPB). KMI is one of the highest yielding energy stocks in the market and we decided to add this stock to our series of dividend picks. In this article, we have tried to analyze the growth in cash flows and dividends and the expected future growth in the dividends of the company. Furthermore, we try to gauge the sustainability of growth in dividends through the prospects of its business segments and growth in cash flows.

Growth in Dividends and Cash Flows

KMI paid a cash dividend of $1.60 per share during the last year out of $1.65 per share available for dividends. During the last year, the company had $1.713 billion in cash available to pay dividends, up 21% compared to the previous year. The company always keeps some cushion when it comes to paying cash dividends. The table below shows the cash generated and declared dividends over the last three years.

(click to enlarge)

The trend in the cash available to pay dividends has been extremely strong - however, the cushion in the cash was the lowest during the last year. The company declared about 97% of its available cash in the shape of dividends compared to 90% in the last year and about 86% for 2012. The trend in dividends shows that the company is paying out more cash and retaining less. For the next year, KMI has announced an annual dividend of $1.72 per share, showing an increase of about 8% from the last year. We believe that the continued growth in the KMP and EPB cash flows will allow the company to continue growth in its dividends.

Total distributions to KMI from KMP were $1.98 billion during the last year, including distributions for both general partner interest and common units the company holds. For the same time period, cash distributions from EPB stood at $441 million - after adjustments for administrative expenses, interest and cash taxes, the company was left with cash available for dividends of about $1.72 billion. The figure below shows the budgeted cash for the next year and cash dividends.

The majority of the cash will be coming from the natural gas pipelines segment of the company followed by CO2 and Terminals and Products Pipeline businesses. It is important to remember that the company has assembled some of the best assets in North America and it is focused on fee-based businesses, which are going to drive the growth in future cash flows for the company.

Future Growth Prospects

As the company mainly derives its growth from its interest in KMP and EPB. It is imperative that we analyze the growth prospects of these two partnerships.

Kinder Morgan Energy Partners:

The key success factor in the energy distribution industry is the asset base a company possesses. KMP is well known for its higher quality assets around the country and across borders. KMI has been selling (dropping down) assets to its partnerships - the sales to KMP and the acquisition of Copano will be accretive to the cash flows of the partnership, which will result in continued growth in cash distributed to KMI. The previous growth in distributable cash flows has been extremely impressive for the partnership, which I have discussed in a separate article.

The partnership has allocated a huge chunk of its resources for capital expenditures in the last year. A major portion of the CapEx will be spent on the natural gas segment. The growth drivers for the natural gas segment include shale-driven expansions/extensions, LNG exports and increased Gas demand for power generation. Over the last few years, KMP has focused on strengthening its natural gas resources. The partnership will hugely benefit from the Copano transaction, which has enabled KMP to gain access in resource abundant areas such as Texas and Oklahoma. This has also allowed KMP to access the shale formations of Eagle Ford and enabled the partnership to expand significantly its midstream footprint in the industry.

Another growth driver for KMP is its CO2 business segment. KMP has improved its crude oil extraction process with its professional expertise. KMP uses CO2 for enhanced oil recovery from mature oil wells. This technique has enabled the partnership to extract crude oil from shallower depths than that of shale. The U.S production of crude oil is expected to increase by 22% by 2019, allowing KMP to increase its throughput. Therefore by analyzing the future growth of this segment, KMP has increased the capital expenditure allocation for the CO2 segment to $1.076 billion.

For the Copano transaction, KMI decided to forgo incremental IDRs - the company will forgo $120 million in each of the next two years and $110 million in 2016, after which the annual amounts will decrease by $5 million every year.

El Paso Pipeline Partners:

The recent increasing demand for natural gas and its exports to major countries forced the companies to increase their throughput - EPB owns 12,600 miles of transportation pipelines. As I mentioned above, approximately 54 percent of cash flow at KMI in 2014 is projected to come from the natural gas assets of the company. Therefore, the company has increased its natural gas supplies by expanding the Elba Express Phase B Extension, which was placed in service in 2013, to 220 MMcf/d to cater the southeast markets. Another important asset for EPB is the Elba Island Liquefaction Project which has been formed to develop and own a natural gas liquefaction plant at SLNG's existing Elba Island LNG terminal to export LNG. These projects will prove to be very beneficial for EPB increasing its cash distribution and organic growth in the future. Furthermore, KMI intends to dropdown its 50% interest in the Ruby Pipeline, 50% interest in Gulf LNG and 47.5% interest in Young Gas Storage. As a result of these dropdowns, the partnership will have a bigger asset base and the cash distributions to KMI will likely increase.


The growth in the cash flows and the dividends has been extremely impressive for KMP and the future growth prospects also look bright. The company is trying to become a pure-play general partner by dropping down its assets to the partnerships. As the discussion above has shown there are a lot of opportunities for these partnerships to grow cash, I believe the cash distributions to KMI will continue to grow. At the moment, the stock has a dividend yield of over 5%, and I believe it is an excellent dividend pick.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.