Earnings season for the MLP sector officially got underway last night with Kinder Morgan reporting Q2 2011 results. The highlight of the release was a distribution increase to $1.15 per unit or $4.60 annualized. KMP currently yields 6.3% on this dividend. From the release :

HOUSTON, July 20, 2011 – Kinder Morgan Energy Partners, L.P. (NYSE: KMP) today increased its quarterly cash distribution per common unit to $1.15 ($4.60 annualized) payable on Aug. 12, 2011, to unitholders of record as of Aug. 1, 2011. The distribution represents a 6 percent increase over the second quarter 2010 cash distribution per unit of $1.09 ($4.36 annualized).

KMP is on track to beat their financial plan for 2011. As in Q1 they re-iterated on the call that they are ahead of plan and if the current environment continues in the second half they should beat their $4.60 distribution target for this year. The only negatives in the report were a slight decrease in their refined product pipeline volumes due to the weak economy and a non-cash legal reserve charge they took due to a legal rate case in California which they intend to fight. On the positive side the natual gas pipelines segment, the CO2 segment, and the terminals business are all doing very well. There is no better diversified MLP than KMP and they continue to show the strength of their diversification. The table below shows their business breakout as of Q2 2011

The highlight of the earnings announcement was the earnings call that took place after the market closed. It just goes to show how important it is to listen to every earnings call for your stock holdings. On the call there were several important hightlights;

  • Rich Kinder said the current opportunties in the midstream MLP space are the greatest he’s seen in his 30 years in the business. These are important words from the man who basically created the energy MLP sector. This echoes similar comments from other MLPs, like EPD.
  • KMP has taken a preliminary look at 2012 and from a high level they expect to do better than their long term average projections of 5% distribution growth for KMP and 10% for KMI. This bodes well for investors in 2012. Part of this optimism is due to them being able to lock in higher hedge prices for their CO2 and crude oil production. Their 2012 hedges are $18 above their 2011 hedges for example.
  • Current opportunities in the coal export sector, the CO2 sector have the opportunity to drive strong growth. Also, they see more opportunity in the Eagle Ford shale. BHP Billiton’s recent acquisition of Petrohawk (HK) is expected to have a positive impact in drilling in that shale play. They are also very optimistic about the Haynesville shale.

All in all it was another good quarter for KMP. Investors in KMP today get a 6.3% dividend yield with about a 6% growth in distributions this year and it looks like another 6% at least next year. That’s a total return expectation of 12.3% going forward. And its tax deffered. Not bad for the most dividersified, lowest risk MLP in the sector. KMP is the bar which other MLPs should be compared against.

For an even better deal, investors can buy KMR shares which yield 7.1% and have the same growth potential. Also, KMP’s general partner, KMI, yields 4.2% (and also increased its dividend in Q2, to $0.30 per unit) and has a growth potential of 12%, double that of KMP.

Disclosure: long KMP

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