Here’s What to Watch When El Paso Pipeline Partners Reports

El Paso Pipeline Partners reports second-quarter results on Jul. 16. Here’s what to watch.

Matthew DiLallo
Matthew DiLallo
Jul 16, 2014 at 10:45AM
Energy, Materials, and Utilities

Ruby Pipeline being constructed. Source: Kinder Morgan

El Paso Pipeline Partners (UNKNOWN:EPB.DL) will release its second quarter results after the market closes today. This should be a busier than normal quarter for the MLP as it recently completed $2 billion in drop down acquisitions from its General Partner, Kinder Morgan. In addition to that, the company continues to move forward on its plans to join Cheniere Energy (NYSEMKT:LNG) and construct two LNG export facilities in the U.S. Its that upside to LNG exports that investors will want to keep an eye on this quarter. 

Drop downs complete
However, before we get to the future, let's take a quick look at what to expect this quarter. The second quarter saw El Paso Pipeline Partners acquire $2 billion in assets, which included a 50% interest in the Ruby Pipeline, a 50% interest in Gulf LNG and a 47.5% interest in Young Gas Storage. While these acquisitions represent a big deal for El Paso Pipeline Partners, it's one that unfortunately won't move the needle to fuel future distribution growth. This is due to the fact that the positive contributions from these new assets will be nearly completely offset from the negative impacts of two rate case settlements as well as lower contract renewals on the Wyoming Interstate Company system.

Because of the muted impact of the acquisitions, El Paso Pipeline Partners' unit holders won't see a distribution increase this quarter. In fact, the company doesn't anticipate another distribution increase until after 2016, which is when the company's $1.5 billion of organic expansion projects are expected to begin service. That being said, the real growth driver at El Paso Pipeline Partners, and the reason to invest in the company, is its potential in LNG exports.

LNG updates?
El Paso Pipeline Partners, like Cheniere Energy, is currently pursuing two separate LNG export facilities as it's looking to build an LNG franchise. While Cheniere Energy should be exporting natural gas by the end of next year from Sabine Pass, El Paso Pipeline Partners is just getting started. Because it's so early in the process investors need to keep a close eye on developments to make sure the company remains on track.

One of El Paso Pipeline Partners' export projects just joined the company via the acquisition of a 50% stake in Gulf LNG, which also includes the Gulf LNG Liquefaction Project. That project will add liquefaction and export capabilities to an existing terminal, which is a similar project to the company's Elba Liquefaction Project in Georgia, which is a joint venture with Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B).

The Elba Liquefaction Project combines Royal Dutch Shell's global leadership in LNG with El Paso Pipeline Partners' vast natural gas network. In the second quarter, Shell and El Paso Pipeline Partners were to have the environmental assessment complete and the environmental impact statement issued. If everything goes according to play, construction is scheduled to begin next year and the project should begin service in late 2016. The following slides provides the details on the project. 

Source: Kinder Morgan Investor Presentation (Link opens a PDF)

When it comes to El Paso Pipeline Partners' second quarter results, investors will want to see the company note that it is making positive progress on both projects. These are very long lead time projects that are critical to distribution growth in the later end of the decade. Any sign that these projects will not come to fruition would force El Paso Pipeline Partners to find a fuel other than LNG exports to drive distribution after its current organic growth projects are complete by the end of 2016.

Invest takeaway
In the near term there's not much to look forward to at El Paso Pipeline Partners. While the company wrapped up a major drop down transaction in the second quarter, the deal only replaces income lost from other assets. That's why investors need to keep an eye on the company's LNG future, because joining Cheniere Energy in building a LNG franchise is the real future growth driver of this company.