KMP, Calpine Extend Shipping Deal

Zacks

Pipeline operator Kinder Morgan Energy Partners L.P. (KMP) has inked an extended agreement with power producer Calpine Energy Services L.P. (CPN). The deal entails Kinder Morgan to transport and store natural gas for power plants in Texas.

Kinder Morgan will provide up to 450,000 dekatherms per day of transportation service and 5 billion cubic feet of storage capacity for 9 Calpine electric generation facilities in Texas. This will boost the current contracted transport capacity offered by Kinder Morgan by one-third.

Again, the pipeline operator intends to spend approximately $30 million for the expansion of its intrastate pipeline system in south Texas. The extended pipeline will ship gas to Calpine's Magic Valley Generating Station in Hidalgo County.

The project mainly aims at shipping natural gas produced in the prolific Eagle Ford shale play in south and east Texas. Kinder Morgan is the largest independent owner and operator of petroleum product pipelines in the U.S. It owns or operates more than 46,000 miles of pipeline and approximately 180 terminals.

The partnership will spend approximately $11 billion in organic projects through 2015. For 2013, nearly $3 billion is planned for expansion and acquisitions. Kinder Morgan is reaping benefits from the recent boom in oil and gas exploration in the North American shale formations as most of these basins have very few or no transportation infrastructure.

We believe Kinder Morgan is an attractive investment opportunity, capable of delivering high returns going forward. This is facilitated by frequent natural gas shale play discoveries, an increase in CO2 demand in the Permian Basin, and growing demand for export coal.

However, the distribution growth scenario is closely related to the successful completion of organic growth projects. This, in turn, might be adversely affected by operational hindrances or delays in completion. Additionally, it remains vulnerable to macro conditions, unstable oil and gas prices and interest rate fluctuations.

Kinder Morgan units currently retain a Zacks Rank #3, which is equivalent to a short-term Hold rating. However, there are certain other pipeline companies like Access Midstream Partners, L.P. (ACMP) and Atlas Pipeline Partners L.P. (APL) that offer value and are worth buying now. These companies sport a Zacks Rank #2 (Buy).

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