Inside Kinder Morgan: Terminals

Based on combined enterprise value, Kinder Morgan is the third largest energy company in North America. We tend to associate the giant with its 75,000 miles of pipelines, but in reality, its operations are incredibly diverse. Over the course of the next week, I'll take a closer look at each of the midstream company's five distinct business units, beginning today with its terminals segment.

Background on the assets
Kinder Morgan operates the largest independent terminal network in the United States. Everything from liquids to coal to steel has its place among the company's 180-plus terminals located all over the U.S. and in parts of Canada. Systemwide, the network has about 100 million barrels of liquids capacity and processes 100 million tons of materials every year. Its most important terminal asset locations are in New York Harbor and the Houston Ship Channel.

Taking a closer look at the liquids and bulk business within the Terminals segment, we see that bulk tonnage actually decreased in 2012, though it is expected to pick up this year. Liquids throughput increased significantly, and that trend is expected to continue.

Ores and metals, coal, and petroleum coke represent 67% of Kinder Morgan's bulk terminal business, while refined petroleum, chemicals, and fuel grade ethanol make up 73% of the liquids business. Even within this segment, diversification is important .

Last quarter, Kinder Morgan's terminals segment generated $198 million in earnings. It marked a 7% increase year over year, and though that was the smallest growth increase across all of Kinder Morgan's business units, the partnership is looking to remedy slow growth in the segment by injecting capital into a few of its existing projects in 2013.

We'll dive into specific plans in a minute, but for now, know that Kinder Morgan expects its Terminals segment to yield $1.46 billion in net revenue in 2013. That would be about a $118 million jump over 2012's number and would more than double the year-over-year increases of the past. The segment's revenue has increased by approximately $50 million annually over the past three years.

One deal that is no more
Kinder Morgan officially suspended its effort to enter into a public-private long-term lease operating deal with the Port of Wilmington. Investors were intrigued by the deal; citizens of Delaware and local union officials, less so. Despite the port's desperate need to be revitalized, increasing opposition to the plan forced Kinder Morgan to punt. Though the company has not completely withdrawn its offer, the ball is in the court of Delaware's state officials, and the outlook is grim.

A look ahead
Although the deal to run the Port of Wilmington isn't working out, I like that Kinder Morgan is open to pursuing that sort of opportunity. In the meantime, there are plenty of deals going through.

We'll start with Kinder Morgan's recently announced plan to partner with Watco in a long-term agreement with Mercuria Energy Trading to build a 210,000-barrel-per day rail project on the Houston Ship Channel. The project will bring crude from Canada, the Bakken Shale, Cushing, Okla., and West Texas into Houston. According to Terminals President John Schlosser, it will be the first major crude-by-rail unloading facility in Houston. With all the news about oil on trains lately, it's hard to see anything but upside with this deal. Phase 1 of the project should be operational by the third quarter of this year, with phase 2 slated to come online by the third quarter of 2014.

Another important boost to the terminals segment is expected to start up in the third quarter. That's when commercial operations are slated to begin at the Battleground Oil Specialty Terminal on the Houston Ship Channel. Kinder Morgan Energy Partners has a 55% stake in BOSTCO, a 52-tank storage facility with a capacity of 6.5 million barrels. Nearly all of the facility's capacity has already been contracted.

Moving north to the partnership's Canadian terminals, Kinder Morgan expects to complete a terminal project in Alberta by December. Located in Edmonton, this facility has a capacity of 3.6 million barrels and is supported by long-term contracts. Additional capacity of 1.2 million barrels is expected to come online in 2014.

All told, between now and the end of 2014 Kinder Morgan will have about $1.43 billion in terminal projects coming online, with an additional $250 million to $550 million in projects under review.

Foolish takeaway
Kinder Morgan's terminals business is an important part of its energy network. The diversification of revenue is always important, and that's exactly what this segment gives the partnership. Now that we've broken down exactly what the segment looks like, we can better evaluate its progress in the coming months and years.

For investors who want a clearer picture of the company as a whole, check out The Motley Fool's new premium research report on Kinder Morgan. It breaks down the company's growing opportunity, as well as the risks to watch out for, to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.

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Fool contributor Aimee Duffy has no position in any stocks mentioned. Click here to see her holdings and a short bio. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.The Motley Fool recommends and owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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