As the sponsoring firm or general partner, KMI stock has been able to take advantage of the lucrative “drop-down” relationships with its MLP subsidiaries. By placing pipeline, storage and terminal assets into a MLP, KMI has been able to avoid taxes and receive generous distribution payments back from the MLPs.
Those payouts have gotten even juicer over the years as the continued relationship between KMI and its two publicly traded MLP subsidiaries has grown. Both the El Paso and Copano buys were perfect candidates for this, and Kinder Morgan has been able to “drop down” plenty of assets into its MLPs.
Secondly, KMI has been able to gain valuable incentive distribution rights (IDRs) from the two MLPS. Those extra payments are set up to ensure that the general partner is doing right by the MLP and serve as an extra reward for “dropping down” assets. The growth in KMP and EPB has Kinder Morgan now in the top bracket for receiving IDRs.
So with KMP managing to report that its distributable cash flows rose 28% YOY to hit $635 million and EPB reporting a slight bump in its DCF numbers, KMI shareholders should be pleased. Perhaps even more so when they realize that their dividends are going to grow because of the bumps at KMP and EPB.
Cash available to pay dividends at KMI surged around 21% during 2013 to reach $1.7 billion. That number trounced management’s original estimates of just $1.63 billion. Overall, KMI estimates that its dividends will grow about 8% in 2104 to reach a $1.72 per share. At today’s prices, that would put KMI’s yield at a juicy 4.7%.
“You Sell, I’ll Buy”
With the distributable cash flows at both its MLP subsidiaries rising, many of Hedgeye’s original concerns seem to be fading. In fact, Chairman and CEO Richard Kinder during the conference call responded pretty directly to the Hedgeye analysts by saying “My message to those who saw the story less positively was: You sell, I’ll buy, and we’ll see who comes out best in the long run.”
So far, it looks like Hedgeye analysts are eating their words.
With KMI planning on dropping down more assets into El Paso — such as its Ruby Pipeline, Gulf LNG terminal and its 47.5% interest in the Young Gas Storage facility — the longer-term cash flows should continue to grow at the firm. Similar drop downs and asset sales are planned for KMP.
All of these will benefit KMI stock on the back end.
KMI stock currently trades for a forward P/E of 22. While that isn’t exactly dirt cheap, you are paying a slight premium for the leading midstream firm in the nation. The premium is certainly warranted as Kinder Morgan continues to churn out cash flows and dividends back to shareholders. Follow Richard Kinder’s lead and buy when others sell.
As of this writing, Aaron Levitt was long KMI and KMR.