Kinder Morgan Energy Partners (KMP) is a primary energy storage and pipeline company working in North America. The company distributes gasoline, diesel fuel, jet fuel and natural gas liquids to a variety of markets through its 8,400 miles of petroleum products pipelines. In addition, for the natural gas section, KMP has 16,200 miles of natural gas pipelines. Along with the distribution pipelines, KMP also operates gas treating, storage and processing facilities.
Kinder Morgan is a limited partnership and makes heavy cash distributions. In my prior articles, I have talked at length about the capital structure, profitability and earnings quality of KMP. In order to assess the stability of KMP's cash flows, I have conducted a free cash flow analysis along with some essential ratios. For any company with such high cash distributions, it is essential to gauge whether the firm will be able to generate enough cash flows from its operations. For my analysis, I have used company SEC filings, and the analysis covers previous three years. Along with cash flows, analysis also includes debt and some debt coverage ratios which can help determine the debt situation of the company.
Free Cash Flows:
Free Cash Flows
Depreciation and Amortization
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Long Term Debt
Kinder Morgan's net income has shown a mixed trend during the past three years. The net income increased in 2010 before falling back in the next year. However, depreciation and amortization expense has increased steadily over the past three years. At the end of 2009, depreciation and amortization expense stood at $850 million which went up to $954.5 million at the end of 2011. The pipeliner generates healthy funds from operations (FFO). In each of the past three years, Kinder Morgan has generated over $2 billion in funds from operations. At the moment, FFO for Kinder Morgan stands at $2.2 billion. Furthermore, operating cash flows have shown an increasing trend during the past three years.
At the end of 2011, operating cash flows stood at $2.4 billion. On the other hand, operating cash flows were $2.1 billion at the end of 2009. The company spends a significant amount on business, and in each of the last three years, it spent over $1 billion in capital expenditures. Capital expenditures were slightly lower in 2010 as compared to 2009 and 2011. As a result, free operating cash flows were highest in 2010. At the end of 2011, free operating cash flows stood at $1.225 billion. Over the past three years, KMP's debt has been gradually increasing, and it stood at just above $11 billion by the end of 2011.
A major portion of Kinder Morgan's long-term debt is in senior notes. Almost every year till 2022, one of the senior notes on offering will mature for KMP. Maturing debt will make the company pay almost $1 billion every year in debt payments. At the end of 2011, Kinder Morgan paid $1.6 billion in debt payments. However, future debt payment should be just around $1 billion till the end of 2022. After 2022, the next senior note matures in 2031.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
KMP funds from operations to total debt ratio has been fairly stable at around 0.20 during the past three years. The stability of FFO to total debt ratio indicates the firm is generating enough funds from operations to tackle its debt. Moreover, FFO to capital expenditure ratio indicates that the firm is generating enough funds to cover its capital expenditures internally. In terms of coverage ratios, KMP looks in a sound position. Cash flows from operations to interest ratio is above 3, which means the firm should not have any trouble meeting its interest obligations.
As I mentioned above, the firm is paying some debt almost every year. At the end of 2011, the company paid the highest amount in debt payments. As a result, the debt service coverage for 2011 is the lowest. However, the pipeliner will have to pay only $959.9 million at the end of 2012 in debt payment, which will improve the debt service coverage ratio.
Kinder Morgan is a limited partnership which distributes most of the cash generated through operations to its unit holders. The company has shown impressive profitability and offers a high dividend yield. My analysis indicates that the firm should be able to meet its debt obligations and maintain an impressive cash distribution. I believe the partnership will improve cash flows and revenues due to the integration of El Paso (EPB). I feel the premium price paid for El Paso is fair given the possible synergies in the future. The acquisition will change the balance sheet for the future, but the current analysis hints that Kinder Morgan offers one of the safest dividends in the market.