Since our last buy recommendation of the MLP, its units have gone up by 4.6%. The units offer a dividend yield of 5.9% and have yielded a one year return of 18%. We continue to have a positive stance on this MLP and reiterate our buy recommendation. The highlights of the third quarter are presented below. A major improvement in the performance of the company was achieved against the backdrop of dropdown from 100% of Teekay LNG Partner (TGP) and 50% of El Paso Natural Gas (EPNG).
Kinder Morgan Partners (KMP) announced the increase in cash distribution per common unit to $1.26, representing a gain of 9% over the same quarter last year and up by 2.4% on sequential basis. The cash distribution announced is payable on November 14th 2012, to unit holders of record as of 31st October 2012. The distributions have increased 45 times since the current management took over in 1997. The distributable cash flows were up by 15.5% from last year, to $455 million.
Chart 1: Distributions*
*the chart hasn't been updated for the latest distribution increase
Revenues for the company were up by 10.7% from last year, to $2336 million. Earnings per unit came in at 57 cents, amounting to a 44% increase in earnings from last year.
The five reportable segments of KMP include: 1) Natural Gas Pipeline, which is focused on the business of transporting, storing and selling of natural gas. 2) Products Pipeline, which provides transportation and terminal storage of refined petroleum products, 3) Terminals, offering storage of refined petroleum products, coal, petroleum etc. and 4) The Co2 segment, involved in the business of production and sales of crude oil, and in the transportation and marketing of carbon dioxide.
Table 1: Earnings before DD&A
Increase over last year
Natural Gas Pipeline
The improvement in the earnings of the Products Pipeline segment was primarily due to higher earnings at the West Coast and Southeast Terminals, thanks to before schedule completion of the Carson tank expansion project. Also, acquisitions leading to increased throughput volume expansion of refined products contributed towards the growth of the Southeast Terminal.
The Natural Gas Pipeline segment witnessed growth owing to several factors. These factors included the TGP and EPNG dropdowns, contributions from the Eagle Ford assets and increased earnings from Fayetteville Express.
Co2 business improved against the backdrop of oil production increases at SACROC, NGL production at Snyder Gasoline Plant and higher oil prices. However, the segment was also affected by the lower NGL prices, which are expected to decline further by the end of the year, resulting in a negative impact of $50 million. Growth for the Terminals segment was due to exceptional export coal volume across their terminal network. Volumes for export coals increased by 32% from the same quarter last year. However, overall throughput volume declined by 8%.
Total debt to equity ratio (mrq) stands at 164%, with an interest coverage ratio of 5.25x. The management has previously increased its distributions several times and we forecast no hurdles for further similar increases in the future. The management expects to distribute a total of $4.98 per unit for 2012, up from $4.61 in the previous year. Also, some $2.2 billion are expected to be spent on acquisitions and expansion projects. The company had a cash flow from operations of $2.8 billion for fiscal year 2011, which has been increasing substantially over the years (Chart 2):
Chart 2: CFO
Most of KMP's business is fee-based, which allows the company to isolate itself from the volatility of commodity prices. KMP also inked a deal with Phillips 66 (PSX) for the transportation of Eagle Ford crude and condensate to a Gulf refinery. Going forward we see enhanced cash distribution ability of the company.
Table 2: Competitors
Magellan Midstream Partners L.P (MMP)
NuStar Energy L.P (NS)
Spectra Energy Partners L.P (SEP)
Enterprise Products Partners (EPD)
Enbridge Inc (ENB)
As before, we have a positive outlook with regards to the company and retain our buy rating for the units. The units also seem to be trading below (on EV/EBITDA basis) those of its competitors.
Note: Charts have been sourced from YCharts