Yesterday Kinder Morgan Inc (KMI 2.20%) reported earnings that fell short of analyst expectations by 5.9%.
However, investors should largely ignore this bottom-line miss, because in actuality Kinder Morgan is firing on all cylinders and had great news about its acquisition of Kinder Morgan Energy Partners (NYSE: KMP), Kinder Morgan Management (NYSE: KMR), and El Paso Pipeline Partners (NYSE: EPB).
Kinder Morgan Inc reported revenues of $4.29 billion for the quarter, up 22.1% from last year and beating expectations by 7.8%.
Net income came in at $329 million, or $0.32/share, missing analyst targets by $0.02/share. However, I think that investors should focus more on cash available for dividends (CAD), which supports the generous 4.9% yield. This increased to $435 million, up 2.6% from last year's $424 million figure for the third quarter. While that may not sound like much, when put into context of the last nine months, Kinder Morgan Inc's cash available for dividends is up a healthy 9% over the same period last year.
In fact, management announced that it's on track to exceed its $1.78 billion CAD guidance issued earlier in the year. Thus, it's no surprise that Kinder Morgan announced a 7% increase in the quarterly dividend to $0.44/share or $1.76/year. This means Kinder Morgan now yields roughly 5%.
Meanwhile Kinder Morgan Energy Partners, the workhorse of $120 billion Kinder Morgan family, reported blow-out earnings.
Kinder Morgan Energy Partners' earnings boom
Kinder Morgan Energy Partners' revenues increased 16.3% to $3.93 billion, beating analyst expectations by an impressive 10.1%. The partnership was able to leverage this into a 40% boom in earnings, $976 million versus last year's $697 million. The earnings gain was primarily due to a $230 million one time gain due to an early termination of a natural gas transportation contract. While any termination of a long-term contract isn't a good thing, as I'll soon explain, Kinder Morgan investors have nothing to worry about.
Kinder Morgan Energy's five operating segments were similarly firing on all cylinders, reporting a pre-DD&A (depletion, depreciation and amortization plus one time charges) segment earnings growth of 10%.
Founder, Chairman, and President Richard Kinder explained that the strong results were "Led by outstanding results at Tennessee Gas Pipeline (TGP), increased oil and NGL production at SACROC, and strong results from both our Products Pipelines and Terminals businesses."
The most important metric, distributable cash flow (DCF) was up a solid 10%, to $607 million excluding certain items. However, due to Kinder Morgan increasing its unit count over the quarter, on a DCF/unit basis that figure was up a less exciting 3.1% to $1.31/unit. Management took the good results as a chance to raise the quarterly distribution by $0.01/unit to $1.4/unit, which represents a 4% increase over last year's third quarter. While the distribution coverage ratio of .94 would normally concern me, given that Kinder Morgan Energy Partners is being merged into Kinder Morgan Inc and that this figure is affected by seasonal factors, investors shouldn't be too worried.
El Paso Pipeline Partners showing improvement
El Paso Pipeline Partners has had a tough year, with the FERC (Federal Energy Regulatory Commission) requiring it to lower prices on its Southern Natural Gas (SNG) and Wyoming Interstate Company (WIC) pipelines. This put a crimp in the partnership's earnings growth, with earnings pre-DD&A and certain items up a measly 1%, to $289 million and resulting in an eight percent decline in net income.
On the positive side, the most important metric for income investors -- DCF -- was up a strong 18%. Selling only $75 million in new units this quarter, DCF/unit (excluding certain items) soared 12%. On a nine month basis, DCF was up 7%, 3.1% on a per unit basis, due to El Paso's $503 million in new equity issuance thus far this year. The increase in DCF was attributed to the Ruby Pipeline, Gulf LNG, and Young Gas Storage facility, which were dropped down to El Paso from Kinder Morgan Inc earlier this year in response to the FERC's negative rulings on the WIC and SNG pipelines and the negative effects those events had on El Paso's DCF.
Management also provided updates on two of El Paso's LNG export projects, the Gulf LNG terminal in Pascagoula, Mississippi, and the Elba Liquefaction Project near Savannah, Georgia. Regarding the Gulf LNG terminal, which would export 10 million tons per year of LNG, an environmental review by FERC is under way, and management plans to have early engineering and designs studies complete by early 2015. Should the project receive approval construction would begin in June of 2016 with exports commencing in 2019.
The Elba liquefaction project is further along, with FERC already having provided export authorization to free trade agreement (FTA) nations and El Paso has filed for permission to export to non-FTA nations as well. El Paso has signed an agreement with Royal Dutch Shell to export 2.5 million tons per year of LNG from the facility beginning in 2017.
What investors should focus on
There are three key facts from yesterday's earnings announcement that I believe are the most relevant to current and prospective Kinder Morgan investors.
The first is the fact that this quarter Kinder Morgan was able to secure an additional 1.1 billion cubic feet/day of natural gas carrying contracts. That puts the company's total for the first nine months of the year at 6.4 billion cubic feet/day of new contracted gas carrying demand. To put that number in perspective, it represents 9% of all US natural gas demand, according to Richard Kinder. This ability to so easily secure new contracts is why I'm unconcerned about Kinder Morgan Energy Partners' early contract termination mentioned previously.
The second thing to focus on is Kinder's backlog, which grew by $900 million, or 5.3% over last quarter to $17.9 billion. This feat was made all the more impressive due to the fact that the company put $1.1 billion worth of new projects into operation this quarter. Thus, Kinder actually found $2 billion of new projects to add to their enormous backlog, which will be the main growth engine for the company's earnings and dividend growth going forward. Given the fact that $640 billion is expected to be invested in America's midstream (gathering, transportation pipelines, processing and storage facilities) between 2014 and 2035 investors can, and should, expect that backlog to continue to grow at a rapid pace.
The final piece of long-term relevant news was management revealing that they had secured all regulatory approval for the $70 billion merger announced earlier, save for the approval of its Form S-4, which is used for disclosing relevant information regarding acquisitions or exchanges of shares/units.
Unit holders of the three MLPs being acquired will have to approve the deal as well, but management is confident that the merger will be complete by the end of the year. This is of vital interest to dividend growth investors because management has stated its intent to raise the dividend 16% to $2/share in 2015, with 10% dividend growth guidance through 2020, should the merger go through. What's more, management is confident it can achieve this growth while maintaining a dividend coverage ratio of approximately 1.1, making it a safe payout that income investors such as retirees can rely upon even in harsh market conditions.
Kinder Morgan is considered by many to be the bluest of the blue chips in the midstream energy sector, and this quarter shows why. Kinder's ability to grow its backlog at an annualized rate of 22.9%, secure vast quantities of new gas transportation contracts, and over-deliver on its cash available for dividend distribution growth is why I consider Kinder Morgan one of the best dividend growth investments you can make today.