Image source: Kinder Morgan Inc. 

All things considered, Kinder Morgan (KMI 0.51%) is having a relatively stable year. Despite the pressure from several sources, the company's distributable cash flow over the first six months was just 2.3% lower compared to last year. One of the reasons why cash flow has held up is due to the solid performance of the company's natural gas pipeline segment. Not only does the division supply the bulk of its earnings, but its growth is helping to mute some of the impacts of its weaker segments.

A closer look at the bright spot

That strength of the natural gas pipeline segment amid the storm is evident in the chart below:

Data source: Kinder Morgan press releases. Chart by the author. In millions of dollars. 

Overall, segment earnings are up slightly less than 1% to $1.958 billion. While that is below the 3% growth rate of the Canada segment, growth was higher in aggregate. Several factors fueled that performance, including an increased contribution from expansion projects on the Tennessee Gas Pipeline (TGP) and improved performance on the Hiland midstream assets. That said, lower commodity prices and reduced volumes on some of the company's midstream gathering and processing assets muted growth. 

Kinder Morgan's natural gas pipeline segment also benefited from a 3% increase in natural gas transport volumes. Driving that growth was the expansion projects on TGP, higher volumes on the company's NGPL joint venture due to deliveries to Cheniere Energy's (LNG -0.73%) Sabine Pass LNG export facility, and higher volumes on the El Paso Natural Gas pipeline due to increased volumes to Mexico and the desert southwest. Another key driver of volume growth was natural gas demand for power generation, which was up 8% on Kinder Morgan's pipelines.

Can the natural gas segment continue to carry the load in the second half?

Despite that solid first-half performance, Kinder Moran expects its natural gas segment to end the year a bit weaker than anticipated. Initially, the company projected that segment earnings would increase by 2% to $4.220 billion. However, as a result of several factors, it now sees segment results coming in 2% below budget, or roughly flat with last year's result. While that is disappointing, it is not quite as bad as the products pipeline and terminals segments, which were projected to grow earnings by double digits, but are now expected to come in 4% and 5% below budget, respectively.

In many ways, Kinder Morgan's natural gas segment is taking one step forward and one back. Several factors are driving results forward. For example, volumes are expected to continue ramping at Cheniere Energy's Sabine Pass facility, which just commissioned activities on its second export train. Meanwhile, construction on NGLP's Chicago Market Expansion project is wrapping up, with that project expected to be in service in the fourth quarter. Likewise, phase 1 of the Texas Intrastate Natural Gas system is supposed to be complete and in service next month. Supporting that demand is another of Cheniere Energy's LNG export projects as well as customers in Texas and Mexico.

That said, regulatory delays pushed back projects at Elba Express Company and on the Southern Natural Gas (SNG) pipeline by four-and-a-half months. As a result, these two projects will not go into service until the fourth quarter, muting their impact on 2016 results. Meanwhile, lower volumes in the company's midstream groups are also expected to weigh on results in the second half.

In addition to that, Kinder Morgan signed a strategic joint venture with Southern Company (SO 1.12%) to sell half of its SNG pipeline to the utility. As a result of that sale, which brought in $1.47 billion in cash for debt reduction, Kinder Morgan will hand over half of that pipeline's roughly $400 million in annual EBITDA to Southern Company. While the company's guidance does not currently account for this transaction, Kinder Morgan just closed the deal last week. That quick closing means even lower natural gas pipeline segments results in the back half of the year.

Investor takeaway

Kinder Morgan's natural gas pipeline segment continues to be its biggest contributor, both in terms of earnings and growth. That said, while that segment was its best performer during the first half, the company does not expect that to continue in the second half due to several factors that will impact results. Still, given that it supplies more than half of Kinder Morgan's earnings, and it has $4 billion of growth projects underway, this segment will continue to be a vital part of its future.