On January 15, the Kinder Morgan family of companies, Kinder Morgan (KMI +0.74%), Kinder Morgan Energy Partners, L.P. (NYSE: KMP), and El Paso Pipeline Partners, L.P. (EPB +0.00%) reported earnings.
The earnings, and some takeaways
The distribution for Kinder Morgan Energy Partners increased 5% quarter over quarter to $1.36. For 2013, the declared cash flow was $5.33, an increase of 7% from 2012.
Kinder Morgan Energy Partners had positive distribution coverage of $36 million for the quarter and of $22 million for the year. A large part of the growth in the unit's distributable cash flow was due to the success of its natural gas pipeline segment. The smaller El Paso Pipeline Partners kept its $0.65 quarter distribution stable from the previous quarter. For the full year, it distributed $2.55 per unit, a 13% increase over 2012. El Paso Pipeline Partners had positive distribution coverage of $16 million for the full year.
Because it receives distributions from both aforementioned companies as general and limited partner , Kinder Morgan is also doing well. Its quarterly dividend is $0.41 per share, which is in line with the previous quarter. The cash flow available to pay dividends grew 21% for the full year from $1.4 billion in 2012 to $1.7 billion in 2013.
Solid tailwinds
Because they are the market leaders in each of their business segments, the Kinder Morgan family of companies enjoys several competitive advantages.
First, the companies have been investment grade since inception, meaning they have a lower cost of debt, and can realize higher margins and distributions to shareholders.
The U.S. shale boom is showing no signs of slowing down. According to BP forecasts, the United States will be self-sufficient in supplying its energy needs by 2035.
As shale boom continues, the amount of oil and natural gas that flows through pipelines will increase. Since pipelines generally make money from the volume that flows through their pipes, those pipeline companies will see greater profits.
Kinder Morgan can also take business away from railroads, which are currently benefiting greatly from the boom in the Bakken and other shale plays. It generally costs $12 to $15 a barrel less to ship oil through pipelines than railroads.
CEO Richard Kinder bought 828,000 shares of Kinder Morgan in December 2013. He now collectively owns more than 230 million shares. The CEO buying his own company is a big vote of confidence since he is the investor with the most information.
The bottom line
The Kinder Morgan family of companies is very well run and each has an excellent track record.
Because MLPs cannot retain their earnings and need to raise money to grow, Kinder Morgan and other MLPs depend on investor sentiment. While most trends are positive, some investors are concerned about the effect that rising interest rates will have on Kinder Morgan. Because the 10-year U.S. Treasury yield has steadily increased over the past year, some investors are concerned that the rising 10-year will crowd out other fixed income securities.
In terms of actual interest rate risk, Kinder Morgan is hedged pretty well. According to an investor presentation, a 100 basis point increase in interest rates equates to a $48 million increase in interest expense for Kinder Morgan Energy Partners. El Paso Pipeline Partners has no current floating rate debt exposure.
In terms of investor appetite, because Kinder Morgan stock has performed relatively well in a rising interest rate environment, it should continue to do so, and I believe each company in the Kinder Morgan family still makes for a solid investment.
