A Kinder, Gentler Profit Machine

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Few businesses sound more boring than operating pipelines. But with 29% annual returns since inception, Kinder Morgan Energy Partners (NYSE: KMP) has proven anything but. Not only is it unfair to characterize Kinder as boring, it's also not strictly a pipeline company. A look at each segment, which in sum just set a new quarterly record for distributable cash flow, reveals a lot more going on beneath the surface.

CO2, who knew?
The CO2 business is definitely pipeline-related, as Kinder moves more than a billion cubic feet of the gas every day. But there's also a nice little oil business tucked in here. CO2 is used to flood mature oil fields in a technique known as enhanced oil recovery (EOR). With so much CO2 on its hands, Kinder decided to dip a toe into the EOR pool by picking up some assets that Marathon Oil (NYSE: MRO) deemed non-core back in 2003.

This line of business introduces some commodity risk, which is mostly hedged away, and also some execution risk, in that the recovery of oil may fall short of projections. Indeed, production at SACROC, one of Kinder's two large fields, has come up short of late, falling 10% from last year. The upshot is that higher segment earnings are all but guaranteed by the rising oil price floor that Kinder has secured over the next several years. Note that before non-cash charges, segment earnings still rose 9% this quarter.

Terminals' velocity
Kinder runs a terminals business that is split evenly between liquids and dry bulk goods like coal and steel. It has grown by acquisition, including a recent deal that brought in a long-term metal-handling contract with Nucor (NYSE: NUE). But there are also trends driving organic growth.

I've had less than kind things to say about ethanol lately, but it's coming whether you like it or not. Kinder has seen strong ethanol volumes at its Midwestern facilities, and will benefit from the boom without having to produce the stuff.

A peek at those pipelines
Kinder's product pipelines, which move refined products like gasoline and diesel fuel, stretch over 10,000 miles. The segment is looking anything but stretched, with earnings up 38% this quarter. Some of the boost came from Kinder's buyout of BP's (NYSE: BP) interest in a northerly natural gas liquids pipeline, but results were strong across the board.

The natural gas segment is probably foremost in investors' minds, due to high-profile pipeline projects like the Rockies Express, the Midcontinent Express, and the KM Louisiana. I've already mentioned the former more than once. The Midcontinent Express, though, will help to support the rapid growth of Devon (NYSE: DVN), Chesapeake Energy (NYSE: CHK), and the rest of the gang in the Barnett Shale. The Louisiana pipeline will hook into Cheniere Energy's (NYSE: LNG) huge liquid natural gas terminal at Sabine Pass.

These projects are indeed a big deal, and account for more than half of Kinder's capital expenditures over the next four years. At this point, though, I hope it's clear that Kinder Morgan isn't a pipeline partnership as much as a potpourri of perennially profitable pursuits.