Kinder Morgan Energy on the Move

Kinder Morgan Energy Partners (NYSE: KMP  ) is the master limited partnership (MLP) branch of Kinder Morgan (NYSE: KMI  ) . An MLP is a legal structure that offers tax benefits to investors for certain kinds of assets, including pipelines. Kinder Morgan Energy competes with other MLPs like Enterprise Products Partners (NYSE: EPD  ) , Magellan Midstream Partners (NYSE: MMP  ) , and the pipeline operations of integrated oil companies like BP (NYSE: BP  ) .

Dividend delight
Usually, an MLP pays out 100% or more of its quarterly net income in dividends to unitholders (partnership-speak for shareholders). At Kinder Morgan Energy, the quarterly dividend is $0.81/unit, resulting in an annual dividend yield of 6.8%. Furthermore, a portion of the dividend is considered a return of capital and thus is deducted from an investor's cost basis -- and is non-taxable until the units are sold -- providing investors with an additional "tax deferral" incentive for a long-term purchase.

Over the past five years, Kinder Morgan Energy and most of the players in this field have handily beaten the market. Looking at Kinder Morgan Energy's first-quarter results, one might be inclined to think the party is ending. Net income per unit is lower than 2005, and the stock price is about 13.5% off its all-time high from last summer. However, looking toward the future, a lot of good things are heading down the Kinder Morgan Energy pipeline.

Current situation
For the moment, Kinder Morgan Energy has four divisions: natural gas pipelines, product pipelines (diesel, gasoline, jet fuel), terminals, and carbon dioxide (CO2). Natural gas pipelines and terminals produced growth for the quarter; the other two businesses were flat. Earnings were hurt, however, by higher general and administrative costs (benefits, taxes, insurance), and interest charges. The interest charge is being driven higher by rising interest rates and expanding debt.

Debt is expanding because Kinder Morgan Energy is growing to meet the needs of a changing industry through increased capital expenditures and acquisitions. According to CEO Richard Kinder, the gas market is particularly in flux, since producers are expecting substantial liquid natural gas (LNG) volumes to enter the West Coast market through Sempra Energy's future terminals in Baja California. With this increased supply competition coming to the West, energy producers in Colorado and Wyoming are looking East to market their goods.

Looking ahead
To meet this shift, Kinder Morgan Energy is currently engaged in a $4.4 billion, 1,323-mile gas pipeline from Wyoming to Ohio. The "Rockies Express" will be complete by the middle of 2009. Kinder Morgan Energy is also working on a $500 million pipeline expansion in Louisiana, which will start up in early 2009. These two projects will substantially add to earnings, and allow the company to grow dividend distributions going forward.

The product pipeline business is also aggressively expanding, with projects designed to increase fuel volumes to the fast-growing Arizona and Las Vegas markets. Phase 1 of a pipeline expansion from El Paso to Phoenix/Tucson will be in service by this June, with a second expansion complete by the end of 2007. A separate project will expand the pipeline from Los Angeles to Las Vegas, with an additional expansion of that pipeline still under consideration. Beyond the natural gas and product pipelines, additional growth opportunities are being pursued by the terminal and CO2 segments.

Final thoughts
Kinder Morgan Energy offers an opportunity for investors to benefit from America's "oil addiction" without exposure to volatile commodity prices. Pipelines charge a fixed fee on volumes, and demand for natural gas and refined products is relatively inelastic -- higher prices do not really impact consumption. Going forward, a number of projects are under construction, which should allow the dividend to grow and may provide additional capital appreciation of the units. With the current yield at 6.8%, investors can sit back and collect (or better yet, reinvest) some nice dividend checks while waiting for the projects to be completed.

For more petro-Foolishness:

EnterpriseProducts Partners is aMotley Fool Income Investorrecommendation.

Interested in dividend-paying stocks? Sign up for a free trial toMotley Fool Income Investor, our market-beating newsletter. Analyst Mathew Emmert recommends a host of dividend-paying companies like Enterprise Products Partners.

Fool contributor Robert Aronen owns none of the companies mentioned in this article. Feel free to share your comments with him. The Motley Fool has a disclosure policy.

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