Is El Paso Pipeline Partners’ Distribution Worth the Wait?

Construction of the Ruby Pipeline, which was subsequently dropped down to El Paso Pipeline Partners. Source: Kinder Morgan Energy Partners.

El Paso Pipeline Partners (NYSE: EPB  ) investors certainly have a long-term view. They have to as the company currently isn't planning to reward them with a raise until 2017. It has to be tough to wait that long for a higher distribution when MLP peers like Kinder Morgan Energy Partners (NYSE: KMP  ) and Targa Resources Partners (NYSE: NGLS  ) are handing their investors steady distribution increases.

Will patience be a virtue?
Right now El Paso Pipeline Partners is a company in transition. It recently completed a deal with its parent to buy $2 billion worth of pipeline and storage assets. However, the positive impact from these acquisitions was offset by a negative impact from two rate case settlements and a contract renewal. With profit growth stuck in neutral El Paso Pipeline Partners simply can't raise its distribution for the next few years.

There certainly is hope of future distribution increases. Right now El Paso Pipeline Partners is working on $1.5 billion of organic growth expansion projects for its customers. However, these projects won't begin coming online until 2016. Once these projects begin producing cash, El Paso Pipeline Partners will again have the capacity to grow its distribution to investors.

Further, its real growth projects won't be complete until much later. The company is currently working on two proposed natural gas export projects, one along the East Coast and the other along the Gulf Coast. If completed these projects have the potential to fuel substantial distribution growth. The only problem is that neither project is a certainty at this point. 

Photo credit: Kinder Morgan Energy Partners.

Is a bird in the hand worth more?
The question investors need to ask themselves is if the potential gains from future LNG export projects makes El Paso Pipeline Partners worth the wait. It's much easier, on the other hand, to take a company like Kinder Morgan Energy Partners and plot out its future income stream. At present Kinder Morgan Energy Partners yields 6.8% whereas El Paso Pipeline Partners' current yield is 7.14%. We know that Kinder Morgan Energy Partners' distribution is expected to grow by a 5% compound annual rate. At that pace investors today are locking in what should be a 7.4% yield to begin 2017 right when El Paso Pipeline Partners is finally expecting to grow its payout.

That same income growth certainty could also be applied to Targa Resources Partners. The company has grown its payout to investors by 9% over the past year and has plans to boost its payout by another 7%-9% this year. That will help to make its current yield of 4.22% more appealing to investors. Further, this is a company that has $2.2 billion of announced organic growth projects under way that should continue to fuel distribution growth. In addition to that Targa Resources also has the potential ot be acquired, which would earn its investors a quick return.

El Paso Pipeline Partners also might be acquired one day, however, its buyer more than likely will be Kinder Morgan Energy Partners. Given that both have the same parent, which has hinted that a marriage is a possiblity, this is really the only acquisition option on the table. While it's likely to come at a premium, that premium won't be as high as the one Targa Resources could fetch as thanks to its independence and growth prospects.

Investor takeaway
An investment in El Paso Pipeline Partners is really one made with an eye toward the future. One where the company stays independent and its two LNG export facilities are approved and generating gobs of cash. Otherwise, there's not a whole lot to get excited about here. 

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