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Kinder Morgan Lowered Its 2016 Dividend Guidance

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Kinder Morgan’s dividend guidance

Kinder Morgan (KMI) is expected to meet its 2015 dividend guidance of $2 per share. This would represent a ~15% YoY (year-over-year) growth by the end of 2015 versus 2014.

However, the midstream energy giant has lowered its 2016 dividend growth guidance to 6%–10% as compared to the 10% annual dividend growth from 2016 through 2020 that was announced at the time of its consolidation transaction in 2014. This could be one of the major reasons for Kinder Morgan’s crash following its earnings announcement.

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Kinder Morgan’s dividend coverage

Kinder Morgan lowered its dividend guidance due to a significant fall in its coverage. The company had a flat coverage for 3Q15 as dividends equaled distributable cash flows and a total coverage of $228 million for the first nine months. This is quite low compared to the $654 million coverage that was budgeted at the time of the consolidation transaction.

In the company’s third quarter earnings conference call, Kinder Morgan’s executive chairman Richard Kinder said, “Other companies have elected to run at negative coverage but we believe the prudent decision for KMI and we think the market is telling us this, is to continue to grow the dividend but preserve coverage over the period.”

Kimberly Allen Dang, Kinder Morgan’s CFO (chief financial officer), added, “We’re just going to give ourselves the flexibility as we go forward to decide on how much coverage and how much to grow.”

Kinder Morgan’s commodity exposure

Kinder Morgan is exposed to crude oil (USO) and natural gas prices (UNG) prices through its CO2-based crude oil production and Natural Gas Pipelines businesses.

According to the company’s 3Q15 earnings release, “The commodity price impact on the CO2 segment in the third quarter was higher than the sensitivities announced at the beginning of the year.” Kinder Morgan estimates every $1 per barrel change in WTI (West Texas Intermediate) crude oil will impact its distributable cash flow by ~$7 million.

Natural gas midstream activities include natural gas gathering, processing, and treating. Kinder Morgan estimates that every $0.10 per MMBtu (million British Thermal Units) change in the price of natural gas will impact its distributable cash flow by ~$3 million.

Targa Resources Partners (NGLS), DCP Midstream Partners (DPM), MarkWest Energy Partners (MWE), and Enable Midstream Partners (ENBL) are among the midstream companies that have exposure to natural gas prices through their natural gas midstream assets.

Kinder Morgan alone constitutes ~4.6% of the iShares Global Infrastructure ETF (IGF).

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