Kinder Morgan And Broader LP Distribution Conundrum (KMP, EPD, ENB, BSR)

There could be some trouble ahead in at least some of the entities in the pipeline business and the practice of distributions from LP’s if you look at operating numbers and the trends in oil and energy prices versus distributions to holders of the companies. Kinder Morgan Energy Partners, L.P. (NYSE: KMP) has reported a cash distribution per common unit of $1.05 per unit and distributable cash flow of $0.97 per unit, compared with a distribution of $0.96 per unit and distributable cash flow of $1.12 per unit in the first quarter of 2008. The company reported net income of $0.15 per common unit, less than half analysts’ expectations of $0.31 per common unit. Revenue of $1.79 billion was also way off estimates of $2.87 billion.

Kinder Morgan attributed the declines to low prices for crude oil, lower transportation volumes in the refined products business, and reduced steel handling in the company’s bulk terminals business.  We wanted to see how this compares to what is expected for earnings and distributions (dividends) competitors such as Enterprise Products Partners LP (NYSE: EPD) and Plains All American Pipeline LP (NYSE: PAA). Given the results for Kinder Morgan, there are still questions on the earnings versus the dividends.

Analysts are looking for EPS of $0.37 per common unit at Enterprise Products Partners LP and just yesterday the company boosted its quarterly distribution to $0.5375 per common unit.  It called this $2.15 per unit in distributions on an annualized basis.  We have earnings estimates at $1.70 for 2009 and $1.80 for 2010.

Plains All American Pipeline LP is expected to post earnings of $0.83 per unit for this last quarter.  It very recently declared a $0.905 distribution, which is $3.62 on an annualized basis.  The estimates for 2009 are $2.99 per unit and for 2010 are $2.98 per unit.  Plains also recently raised $350 million in notes.

Of course Enterprise, an MLP like Kinder Morgan, will distribute some of its operating cash to unit holders, but also like Kinder Morgan, net income will cover only a small portion of the distribution. The problem for both Enterprise and Enbridge is transportation volumes. If Kinder Morgan’s report is a harbinger of things to come, it could be a sad earnings season for the pipeline business.

Talking about distributions (or dividends) may still be premature at this point.  It is still an issue which we have discussed with financial professionals in the sector.  Many LP’s are able to keep paying higher distributions than income. Some may be attributed to assets sales and some may be attributed to the ability of these companies to raise cash.  How these will be treated by the tax man in the future for their high yields or high returns of capital is something that has only recently started to be up for debate.  We certainly aren’t ready to make any predictions on that front yet.

Kinder Morgan Energy Partners LP (KMP) is down 1.5% at $47.40, Enterprise Products Partners LP (EPD) is down 0.85% at $22.39, and Plains All American Pipeline LP (PAA) is down 1% at $39.54.

Even this thinly traded BearLinx Alerian MLP Select Index ETN (NYSE: BSR) is down 1.5% at $23.48, but the volume there is actually so thin that many traders will have forgotten this one or at least taken it off their radar screens.

Paul Ausick
April 16, 2009