On Wednesday, Kinder Morgan Energy Partners (NYSE:KMP) reported first quarter results after the bell, and the numbers were very strong (all financial and operating data available here). KMP continues to execute on its plan to grow the distribution 5%-7% annually, and units are very attractive at current prices where they yield in excess of 7%. Readers should also note that this analysis fully applies to Kinder Morgan Management (NYSE:KMR), an LLC that only owns KMP units and automatically reinvests all dividends.
For a master limited partnership ("MLP"), distributable cash flow [DCF] is the critical figure to pay attention to. Most investors in MLPs are income investors who are focused on the distribution. DCF is the amount of cash an MLP generates and can pay out. If an MLP is consistently paying out more in distributions than it generates, that distribution could be in danger. Fortunately, KMP continues to robustly grow distributable cash flow and can continue to increase its distribution.
In the quarter, DCF was up 26%, but this figure is a bit misleading for investors. As Kinder Morgan pays out virtually all of the cash it generates, it needs to raise capital, via debt and equity issuance, to invest in growth projects. These projects increase KMP's distribution, but they also increase the unit count. Compared to the first quarter of 2013, the average unit count has increased by 19%. Capital issuance does drag on growth, but these projects are consistently accretive. To factor in changes in the unit count, investors should focus on DCF per unit.
This figure was strong, with DCF per unit coming in at $1.55 compared to $1.46 a year ago. As a consequence, KMP was able to increase its quarterly distribution to $1.38. This figure is up 6% year-over-year and $0.02 from the fourth quarter of 2013. With these results, KMP is poised to deliver on its guidance for a 2014 distribution of at least $5.58 this year. I continue to expect a payout of $5.59, plus or minus $0.03 this year. While distribution growth is slower than it was a decade ago, it should continue to be 5%-7% over the next three years thanks to growing US energy production and an impressive projects backlog.
This quarter was strong pretty much across the board. Natural gas pipelines continue to be the main driver of the business. They contributed $723 million in earnings before depreciation, depletion, and amortization, which amounts to 47% of KMP's earnings before DDA. This sum was also up 45% year-over-year, due in part to acquisitions. Overall transportation volume came in a robust 17,938 Bbtu/d, which was up 5% year over year. As KMP continues to invest in pipelines in growth areas like the Marcellus shale, this volume total should continue to grow by 5+%.
Strong transportation figures drove these results, and pipeline expansions will power further distribution growth. KMP now has a project backlog of $14.9 billion, which is up from $13.5 billion at the end of last quarter. New US production requires new pipelines, which is why KMP is a premiere play on the US energy boom. As KMP builds projects from this backlog, it will continue to grow DCF, which in turn will push units higher. Importantly, debt to EBITDA is only 3.8x, so KMP has a solid balance sheet.
KMP also funds expansion projects evenly between debt and equity, which will keep its balance sheet from getting too levered. This quarter represented yet another quarter of distribution growth. KMP continues to expand its pipeline business, and natural gas pipelines now account for nearly 50% of earnings. With our abundance of natural gas and the potential for eventually exporting LNG, this business has tremendous upside potential. Units are extremely cheap at current levels and yield over 7%. This quarter was yet another reason to buy KMP and enjoy that growing distribution.
Disclosure: I am long KMP. 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.