Kinder Morgan (KMP) reported Q4 2010 results after market close yesterday. Results were in line with market expectations. Here is the summary from the press release:
Distribution 8% Higher Than 4Q 2009
2010 Distributable Cash Flow Up 14% Over 2009
HOUSTON, Jan 19, 2011 (BUSINESS WIRE) — Kinder Morgan Energy Partners, L.P. (NYSE: KMP) today increased its quarterly cash distribution per common unit to $1.13 ($4.52 annualized) payable on Feb. 14, 2011, to unitholders of record as of Jan. 31, 2011. The distribution represents an 8 percent increase over the fourth quarter 2009 cash distribution per unit of $1.05 ($4.20 annualized). KMP has increased the distribution 39 times since current management took over in February of 1997.
For the fourth quarter, KMP reported distributable cash flow before certain items of $366.2 million, up 7 percent from $341.8 million for the comparable period in 2009. Distributable cash flow per unit before certain items was $1.17, flat compared to the fourth quarter last year. Net income before certain items was $425.4 million versus $371.5 million for the same period last year. Including certain items, net income was $416.3 million compared to $324.7 million for the fourth quarter of 2009. Certain items totaled a net loss of $9.1 million, the majority of which was attributable to legal reserves, offset in part by a gain on the sale of 50 percent of Cypress Pipeline.
For full year 2010, KMP produced distributable cash flow before certain items of $1.360 billion, up 14 percent from $1.196 billion for 2009. Distributable cash flow per unit before certain items was $4.43, up 4 percent from $4.25 for 2009. Net income before certain items was $1.521 billion compared to $1.342 billion for 2009. Including certain items, net income was $1.331 billion versus $1.284 billion for 2009.
Chairman and CEO Richard D. Kinder said, “We are pleased to increase our cash distribution per unit for the fourth consecutive quarter. At its current level of $1.13 per unit, the distribution is significantly higher (8 percent) than it was in the fourth quarter of 2009. Overall, 2010 was a good year at Kinder Morgan and we are very pleased with our results, particularly when you consider the state of the economy during the past year. We hit our distribution per unit target of $4.40 for the year, and we generated cash in excess of that distribution, although we did fall a bit short of our annual budget. All five of our businesses produced stronger results in the fourth quarter and for the full year of 2010 than in the comparable periods of 2009. Total segment earnings before DD&A were $876.3 million for the fourth quarter and $3.312 billion for the full year, up 8 percent for the quarter and 12 percent for the full year. These increases reflect solid asset performance and contributions from various investment initiatives. Looking ahead, the company is well positioned for additional growth. In total, we invested approximately $2.5 billion in 2010 to further grow the company, and we will continue to pursue new-build infrastructure opportunities, joint ventures, organic expansions and acquisitions across all of our businesses. As previously announced, we expect to declare cash distributions of $4.60 per unit for 2011, which would be a 4.5 percent increase over 2010.”
So, KMP continues to deliver impressive results. A Q4 2010 8% distribution increase from Q4 2009 for a company with their asset bases is quite an accomplishment. They met their full year goals, as usual, for distributions as well while maintaining a coverage ratio greater than 1. For 2011, they are looking at yet more distribution increases, 4.5% for the full year. Shares are trading down this morning along with the rest of the market and are currently priced to yield about 6.4%. Even in today’s frothy market a 11% forward return (6.4% + 4.5%) is pretty compelling. And shares are still trading at a discount to their historic spread to the 10yr note and only slightly below their average historical yield.
But there is an even better way to invest in KMP and that is through their other share class, KMR. KMR represents the exact same economic interests as KMP but just makes the distribution in shares vs cash. If you’re re-investing dividends there is no difference. An added advantage is that KMR shares are suitable to be owned in IRAs. But the best reason to own KMR over KMP shares is the discount you get when you buy KMR. KMR this morning is trading at around $64. You get a 7% yield (10% premium) for owning KMR over KMP. There is no reason for this except the irrationality of the market. In every call and every presentation KMP takes time to make this case but yet the discount continues. Owning KMR gives you a forward return of about 12%, a compelling return for such a stable enterprise.
For new investors in the MLP space I think KMR is the best investment in the space right now considering both risk and reward. For current investors who might be waiting for better entry prices due to the run-up in MLP prices in Q4 2010, any move in KMR to $60 or below (my target is $57.5, and 8% yield) would be a great buying opportunity.
The next big even for KMP is the public offering of its general partner, KMI. I haven’t seen any exact dates for the IPO of KMI but it looks like it will take place before the end of March. Hopefully, it comes to market at a reasonable valuation. KMI should give investors decent yield with some more upside on distribution growth than KMP. We’ll see.
Disclosure: long KMP, KMR
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