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WIKI ANALYSIS
Kinder Morgan Energy Partners, L.P. (KMP) is a Master Limited Partnership (MLP) that is the largest independent owner and operator of petroleum product pipelines in the U.S., transporting more than two million barrels per day of gasoline, jet fuel, diesel fuel, and natural gas liquids. The partnership also has a capacity to transport 9 billion cubic feet/day of natural gas. It owns or operates more than 27,000 miles of pipelines and approximately 145 terminals. The partnership's terminals handle over 80 million tons of coal and other bulk materials annually and have a liquids storage capacity of about 70 million barrels for petroleum products and chemicals. The partnership is also the largest carbon dioxide marketer and transporter in the country.
The partnership divides its operations in four business segments: Product Pipelines (projected to contribute approximately 27% of the partnership's 2007 distributable cash flows), Natural Gas Pipelines (25%), Carbon Dioxide Pipelines (28% - CO2), and Terminals (20%). Knight Inc. (formerly Kinder Morgan, Inc.), one of the largest mid-stream energy companies in the U.S., owns the partnership's general partner interest and also maintains a roughly 10% limited partnership interest.
Tax Considerations
As an MLP, KMP must distrubute at least 90% of its income from qualifying sources such as natural resource activities, interest, dividends, real estate rents, income from sale of real property, gain on sale of assets, and income and gain from commodities or commodity futures. Much of the distrubution is typically treated as 'return of capital', which causes a downward adjustment to U.S. taxable investor's cost basis. It is not taxable in the year it is recieved, but increases capital gains taxes in the year the MLP units are sold.
Kinder Morgan does business (e.g. owns/manages pipelines) in many states; owners may be required to file income tax returns in each state in which the MLP conducts business, even when no taxes are owed.
MLPs aren't suitable for U.S. investor's IRA accounts because earnings above $1,000 will be considered unrelated business taxable income by the IRS. Tax consequences for foreign owners are generally onerous.
Investors wanting exposure to KMP, but without the tax filing complications, can purchase shares in Kinder Morgan Management LLC (KMR), a NYSE listed company that owns KMP units. KMR usually trades at a discount to the KMP share price, but there is no apparant reason for this.
Business Financials
Trends and Forces
Fluctuations in Oil Prices will impact cash flow
The majority of cash generated by KMP is fee based and is not sensitive to commodity prices. However, in its CO2 segment, the company hedges the majority of its oil production but does have exposure to unhedged volumes, most of which are natural gas liquids.
"The 2009 budget assumes an average West Texas Intermediate (WTI) crude oil price of $68 per barrel for the year ... every $1 change in the average WTI crude oil price per barrel is expected to impact the CO2 segment by approximately $6 million (or about 0.2 percent of our combined business segments' anticipated distributable cash flow). If the average WTI crude oil price per barrel in 2009 were the same as the price experienced in 2008 (about $100 per barrel), then KMP would generate distributable cash flow that could support cash distributions of approximately $4.52 per unit for 2009. This sensitivity to the WTI price is very similar to what the company experienced in 2008." Company press release.
Interest Rates affect current unit value and distribution growth
Calculating Net present value (NPV) is one common method for estimating the intrensic value for a time series of cash flows such as MLP distributions. Interest rate assumptions are crucial to the NPV equation.
Because MLPs distribute virtually all available cash to unit holders, they must access the capital markets to finance growth. This dynamic can cause MLPs to be disciplined acquirers, at least compared to traditional corporations, because management teams must demonstrate to unit holders that acquisitions and projects are immediately accretive to earnings. Internal Rate of Return (IRR) is often used in capital budgeting; interest rates figure prominently in this equation as well. Simply: higher interest rates limit growth opportunities.
Competition
oil & gas pipelines
- Williams Companies (WMB) --
- El Paso (EP) -- EP owns the largest interstate gas pipeline system in the U.S., and is responsible for transporting a quarter of all the natural gas used in the country every day.
- Kinder Morgan Energy Partners, L.P. (KMP) -- Leads the oil & gas pipelines industry in market cap.
- ENBRIDGE (ENB) --
- Spectra Energy (SE) -- Leads the oil & gas pipelines in net profit margin.
- Questar (STR) --
| Competition | Williams Companies (WMB)[1] | El Paso (EP)[2] | Kinder Morgan Energy Partners, L.P. (KMP)[3] | ENBRIDGE (ENB)[4] | Spectra Energy (SE)[5] | Questar (STR)[6] |
| Market Cap $Mil | 10,570.00 | 5,600.00 | 13,250.00 | 11,610.00 | 11,180.00 | 4,640.00 |
| Revenue $Mil | 10,558.00 | 4,648.00 | 9,217.70 | 11,919.40 | 4,742.00 | 2,726.60 |
| Gross Profit $Mil | 5,437.00 | 4,403.00 | 2,145.80 | 2,909.90 | 1,926.00 | 1,394.60 |
| Net Profit Margin % | 8.02% | 9.38% | 9.52% | 6.32% | 19.91% | 18.61% |
| Operating Margin % | 17.48% | 29.13% | 8.76% | 9.64% | 30.41% | 31.10% |
| Miles of Interstate Pipeline | 14,200.00 | 42,000.00 | 25,000.00 | 2,505.00 | ||
| Yield % [7] | 0.39 / 35.78 = 1.1% | 0.16 / 17.24 = 0.9% | 3.48 / 53.99 = 6.4% |
References
- ↑ WMB 2007 10-k, Item 6: Selected Financial Data, page 34
- ↑ EP 2007 10-k, Item 6: Selected Financial Data, page 40
- ↑ KMP 2007 10-k, Item 6: Selected Financial Data, page 48
- ↑ Enbridge 2007 Annual Report
- ↑ SE 2007 10-k, Item 6: Selected Financial Data, page 30
- ↑ STR 2007 10-k, Item 6: Selected Financial Data, page 23
- ↑ = yearly Cash Distribution or Dividend (from Form 10-K) / year-end price
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