Kinder Morgan Energy Partners: Is The Stock Attractively Priced?

May. 7.14 | About: Kinder Morgan (KMP)


Almost all the business segments of the partnership are showing solid growth and continue to add to the cash flows.

Expansion in the CO2 segment will allow the partnership to enhance its cash flows, as CO2 is a high-margin segment.

The growth in distributable cash flows is enough to support the future growth in cash distributions.

Kinder Morgan Energy Partners (NYSE:KMP) is down over 7% year-to-date - in fact, the whole Kinder Morgan Group, including Kinder Morgan (NYSE:KMI) and Kinder Morgan Management (NYSE:KMR), is down - KMI and KMR have lost over 9.5% and 1.4%, respectively. At the same time, KMP has been showing solid progress, and the partnership beat analyst estimates as it announced the first-quarter earnings. I believe the current price level is extremely attractive to initiate a position in the partnership, as the growth in business remains robust.

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First of all, I will talk about the distributable - the image below shows the distributable cash flows at the end of the quarter.

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Source: 10-Q

At the end of the quarter, distributable cash flows for the partnership were up 26% compared to the same period last year, a considerable increase keeping in mind the growth rate in cash distributions. The general partner's interest in the net income currently stands at $453 million, 58% of the total net income available for the partnership. The general partner's interest also included a reduction of $30 million of waived incentive amount related to the Copano acquisition, and $4 million reduction in incentive amount for the January acquisition of APT.

Moving onto the cash distributions - KMP is one of the best partnerships when it comes to growing the cash distributions to the unitholders. The partnership has been growing cash distributions at an impressive rate, backed by solid growth in business segments and distributable cash flows. The table below shows the cash distributions to limited and general partners.

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Source: 10-Q

Year-over-year growth in the per unit cash distributions stands at 5.4% -- KMP has been growing cash distributions at around 5% over the last few quarters. The growth in cash distributions looks sustainable, keeping in mind the growth in distributable cash flows and its business segments (discussed later). Total distributions for the period stood at $895 million, up from $730 million a year ago. I-units are the securities that KMP issues to KMR instead of cash distributions - for the period, the partnership issued over 2.23 million i-units to KMR - the partnership does not make cash distributions on i-units, instead, more i-units are issued based on the amount of cash that KMP distributes to the common unitholders.

KMP has recorded impressive growth in its business segments - the image below shows the growth/decline in the business segments of the partnership - these figures show segment EBDA.

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Source: 10-Q

Natural Gas Pipeline is clearly the largest segment of the partnership, and it has grown by 29% year-over-year - this segment accounts for more than 46% of the total EBDA of KMP. However, this segment is not the best when it comes to margins - the Natural Gas Pipelines segment gives KMP an operating margin of 31% -- $2.17 billion in revenues and $1.5 billion in operating expenses leaves us with EBDA (without earnings from other equity investments and income taxes) of $675 million. On the other hand, the CO2 segment, which is the second-largest segment of the partnership, gives it an operating margin of about 74% -- $483 million in revenues and $125 million in operating expenses - EBDA without earnings from equity investments and income tax expense stands at $358 million.

It does not come as a surprise that the partnership is trying to expand its CO2 business, as it has the highest margin among all the business segments of the company. KMP will spend $671 million to expand its CO2 infrastructure -- $344 million will be spent on increasing the production from the McElmo Dome Source field, Colorado, which will add 200 million cubic feet per day to the production upon completion - the production increase is likely to happen in two stages - the first stage will be complete by July 2015, and the second stage will be in operation by the end of 2015. The remaining investment amount will go towards expanding the 500-mile Cortez Pipeline - the partnership has 50% interest in the Cortez Pipeline. These expansion efforts in the CO2 segment will further enhance the earnings, as well as cash flow generation capabilities of the partnership, as CO2 is the high-margin segment for KMP.

Terminal business gives the second-highest margin to the partnership, at 54% -- it is also the third-largest segment when it comes to addition to the total EBDA - terminals segment added $391 million to the revenues, and operating expenses were $183 million - total addition to the total EBDA was $214 million. Products Pipeline and Kinder Morgan Canada make up the last two business segments. Kinder Morgan Canada was the only segment to show a decline (75%) during the first quarter.

Bottom Line

As the discussion above shows, the growth in the business segments as well as cash flows remains strong for the partnership. I believe the long-term growth prospects of KMP are bright as the partnership continues to expand its high-margin operations, and it will allow KMP to continue growth in its cash flows. In my opinion, KMP units are attractively priced at the moment due to the recent fall.

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. This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.