Morningstar | Natural Gas Growth Lifts Kinder Morgan's Earnings; Decision Coming on Kinder Morgan Canada
We are reaffirming our $19.50 per share fair value estimate after Kinder Morgan announced first-quarter earnings that grew 15% from the first quarter of 2018 and a quarterly dividend hike to $0.25 per share. We are reaffirming our no-moat and stable moat trend ratings.Management's dividend hike represents the third step in its three-year plan to reach $1.25 per share annualized by 2020. We think shareholders should be impressed by management's execution of its dividend growth plan set out in 2017 while improving its credit metrics. We think Kinder's 5% yield at the new dividend rate as of mid-April is attractive relative to other pipeline companies and utilities.
Management reported $0.60 per share distributable cash flow in the first quarter, providing plenty of cover for the higher dividend. Results are mostly on track to meet our full-year estimates. Management said full-year EBITDA could come in slightly below its $7.8 billion budget primarily due to regulatory settlements and a slight in-service delay at the Elba LNG facility. However, the cash flow outlook is on budget.
A slight drop in EBITDA relative to budget would not have a material impact on our fair value estimate, especially since the settlements remove substantially all of its risk of rate cuts related to the Federal Energy Regulatory Commission's so-called 501(g) policy proposal in March 2018. We assumed Kinder maintained substantially all of its current rate levels given the high customer demand for access to its pipelines.
We expect an imminent announcement on Kinder Morgan's plan to reconsolidate or sell its 70% stake in Kinder Morgan Canada. A sale could raise close to $1 billion of cash; a reconsolidation could cost $400 million. Neither would have a material impact on our fair value estimate.
We expect Kinder Morgan will easily finance its $6.1 billion of planned growth projects during the next two years without issuing equity.
Kinder Morgan is an energy infrastructure company. The company's segments are: Natural Gas Pipelines, which includes the ownership and operation of, among others, main interstate and intrastate natural gas pipeline and storage systems; Products Pipelines, which includes the refined petroleum products, crude oil and condensate pipelines; Terminals, which includes the ownership and/or operation of, among others, liquids and bulk terminal facilities; and carbon dioxide (CO2), which includes the production, transportation and marketing of CO2, ownership interests in and/or operation of oil fields and gasoline processing plants in West Texas.
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