Kinder Morgan (NYSE:KMI) and its trusty, cash-generating master limited partnership Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) had a great 2012. That's all in the past now, but there is plenty to look forward to in 2013. Today I'll take a look at what to expect from the partnership this year, focusing on KMP's financial targets and expansion plans.
As the year progresses, investors should keep an eye on the bar that Kinder Morgan's leadership has set for KMP. It's pretty high, resting on stacks of money:
- $5.4 billion in segment earnings (before DD&A)
- $2.9 billion in expansions, acquisitions, and joint ventures
- $2 billion in distributions, targeting $5.28 per unit annualized
- $30 million in cash flow after distributions
The goal of generating $5.4 billion in segment earnings would beat 2012's mark by nearly $1 billion, and is based on the assumption that WTI crude will average $91.68 per barrel this year.
Predicting commodity prices is a fool's errand, but even if the price doesn't meet that average, it shouldn't affect the partnership too badly. The majority of Kinder Morgan's revenue is generated by its fee-based business; it's only the CO2 segment that might be affected. And even there, oil production is hedged for stability, which means natural gas liquids production, which remains unhedged, is all that would be affected. Still, NGL prices tanked in 2012, and management has acknowledged that for every dollar below that magic number of $91.68, the CO2 segment will lose about $6 million in earnings. Naturally, for every dollar above the magic number, the opposite is also true.
Kinder Morgan has a ton of projects coming online in 2013. Its terminals segment posted the lowest growth increase in the fourth quarter of 2012, so let's start there.
Commercial operations are slated to begin at the Battleground Oil Specialty Terminal on the Houston Ship Channel in the third quarter. KMP has a 55% stake in BOSTCO, a 52-tank storage facility with a capacity of 6.5 million barrels. Almost all of the facility's capacity has already been contracted.
The partnership expects to complete a terminal project in Alberta by December of this year. The Edmonton facility has a capacity of 3.6 million barrels and is supported by long-term contracts. Additional capacity of 1.2 million barrels is expected to come online a year later.
Moving on to the fastest-growing segment: natural gas pipelines. This business unit grew 64% year-over-year in the fourth quarter. Much of that growth can be attributed to the booming Eagle Ford Shale play, and the increase of natural gas used for power generation. No rest for the weary, however, as the partnership is in the midst of investing $2.7 billion in its natural gas pipeline assets.
Two of them are similar looping projects coming online in the Marcellus Shale by the end of November. One is an $86 million pipeline system in the Marcellus Shale; it will mostly loop Kinder Morgan's 300 Line, which means it will be installed adjacent to the existing line. Its capacity comes in around 240,000 dekatherms per day, which is roughly equal to 2.3 million cubic feet of gas. It will feed utilities and other connecting pipelines.
The second project is much more expensive at $450 million, and has a couple of FERC approvals still pending, though its target in-service date is still November.
This year will also see the of most of the remaining El Paso assets drop down. KMI will sell its 50% stake of El Paso Natural Gas pipeline, and its 50% stake of El Paso's midstream assets, to KMP. KMI will also drop down its 50% interest in Gulf LNG to its other MLP, El Paso Pipeline Partners(UNKNOWN:EPB.DL).
The drop-down actions will increase distributable cash flow at the MLPs, while bringing KMI one step closer to fulfilling management's goal of returning to a pure-play general partner by 2014. KMI should only hold 50% of Ruby (a Wyoming to Oregon natural gas pipeline), and 50% of the Florida Gas Transmission system by the end of December.
Expect the unexpected
One of the most important aspects of Kinder Morgan is the diversity of its business mix. Yes its pipelines carry a mix of natural gas, crude oil, CO2, and biofuels, but it is more than just a pipeline company. Even its four business segments are diverse enough internally to mitigate weakness in any one or two areas.
For example, in the fourth quarter of this year volumes of refined products (jet fuel, diesel) dropped. The products pipelines segment grew overall, however, because volumes of biofuels and NGLs were up 22%.
The breadth of Kinder Morgan's business increases the likelihood that the partnership can find success regardless of how the immediate future pans out.
This year will likely be very kind to Kinder Morgan and the other midstream companies, as many projects come online and volumes increase. Management will elaborate on its 2013 plans at its analyst day tomorrow. Interested investors can listen here, or click here to add Kinder Morgan to My Watchlist.