We have recently downgraded Kinder Morgan Energy Partners L.P. (KMP) to Underperform from Neutral. Although the partnership’s annualized distribution rate is higher than the industry rate ($4.20 vs. $3.47 per unit) and it expects a 4.8% growth for this year, we are concerned about the sustainability of this growth momentum in the long run.
This is because the partnership’s above-average distribution growth profile is closely linked with a successful completion of organic growth projects. We believe it may face challenges in executing projects following the completion of three large natural gas pipeline projects − REX, MEP and Louisiana.
On a distribution yield basis, Kinder Morgan common units are currently trading at a premium to the peer pipeline MLP group average. This represents a 259 bps spread over the 10-year Treasury bond, compared to the peer group’s average spread of 315 bps.
Among its five business segments, we noticed that Kinder Morgan is heavily reliant on the Carbon Dioxide segment due to its solid earnings generation capacity. Approximately 27% of the partnership’s 2009 earnings (before DD&A and amortizations) came from this segment. However, this business is more sensitive to the economics of oil than most of the partnership’s other fee-based energy infrastructure assets.
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