A Closer Look At Kinder Morgan’s Terminals Business

Kinder Morgan Energy Partners’ (NYSE:KMP) operates one of the largest networks of independent terminals in North America. The terminals business primarily involves the storage, handling and transloading of various commodities. Like most of Kinder Morgan’s other businesses, the terminals business is largely fee-based and has proved to be a relatively stable source of earnings for the company. In this note, we take a brief look at the division’s operations, its recent financials as well as some of the current trends impacting its performance. We estimate that the business accounts for almost 15% of the company’s Trefis price estimate and around just under 15% of total revenues.

Trefis has a price estimate of around $92 for KMP, which is around 15% ahead of the current market price.

Liquids and Bulk Terminals

KMP owns or operates around 113 terminals across the United States and Canada, with a large part of the capacity lying in the eastern U.S. The division’s business can be divided into the liquids, dry-bulk and transloading operations. The liquids operations primarily store refined petroleum products, ethanol, industrial chemicals and vegetable oil, and also transfer these products to and from various modes of transport including pipelines, railways and vessels. The company has a total of around 62 million barrels of liquids storage capacity and handled close to 630 million barrels of liquids in 2012. ^[1] A significant portion of the firm’s liquids capacity lies in the East coast and in the Gulf region. The liquids terminals have been doing quite well off late, owing to strong utilization levels as well as new and restructured contracts with higher rates. During the first half of this year, the firm recorded a utilization rate of around 94% for its liquids terminals, marking an 2% improvement over 2012. ^[2]

The dry-bulk terminal operations primarily involve the handling of materials such as coal, petroleum coke, fertilizers, steel and ore. The terminals division also operates about 35 transloading facilities, which transfer shipments from one mode of transport to another (from rail to trucks, for example). The bulk terminals business has been witnessing some headwinds off late, mainly due to sluggish coal and steel volumes in the United States. The coal handing volumes declined by around 21% in Q2 2013, primarily due to a weaker coal exports from the U.S. Overall, the bulk transloading tonnage has fallen from about 50 million tonnes during the first half of 2012 to about 44 million tonnes during the first half of 2013. ((Form 10-Q))

A Fee-Based, Diversified Business Model

The terminals division’s revenues have witnessed a relatively slow yet steady growth over the past few years, rising from around $1.26 billion in 2010 to around $1.36 billion in 2012 (about 4% CAGR) while earnings before depreciation, depletion and amortization expenses have increase from around $641 million to around $709 million during the same period (5% CAGR). Activity for terminals is largely tied to the health of the broader economy and the demand for various commodities, but the business is helped by the fact that it is fee-based and well diversified with exposure to a variety of commodities including fertilizers, chemicals as well as petroleum products. Revenues are tied to the volumes of the commodities that are handled. While revenues may not be impacted significantly by volatility in commodity prices, higher prices could enable the company to charge better rates on new and renewed contracts.

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Growth Will Come Primarily From Expansion

Like most of Kinder Morgan’s other business divisions, the terminals division is also quite capital intensive. We believe that much of the division’s future growth will hinge on expansion projects since many of its facilities such as the liquids terminals are currently operating at relatively high utilization levels. The company currently has a project backlog of close to $2 billion for the terminals business. ((Seeking Alpha)) The firm’s two largest projects include the construction of the BOSTCO (Battleground Oil Specialty Terminal Company) terminal in the Houston Ship Channel as well as the expansion of the Edmonton terminal in Alberta, Canada.

KMP owns a 55% stake in the BOSTCO project, which is a joint venture with TransMontaigne Partners. The BOSTCO terminal will have a  total capacity of around 7.1 million barrels when it is completed in late 2014. The Houston Ship Channel, where the BOSTCO terminal is located, is expected to see a lot of activity given the growth in oil production from shale plays and KMP has mentioned that the entire capacity on this terminal is already subscribed. The first portion of the project is slated to be active by this month. The expansion of the Edmonton terminal in Alberta will involve building around 4.8 million barrels of additional storage, taking the total storage capacity at the Edmonton facility to about 9.4 million barrels. ^[3]

Understand how a company’s products impact its stock price on Trefis

1. Form 10-K [↩]
2. Form 10-Q [↩]
3. KMP Q2 Press Release [↩]