Kinder Morgan Energy Partners L.P.‘s (KMP) first quarter 2012 earnings of 61 cents per limited partner unit (excluding certain items) fell short of the Zacks Consensus Estimate of 63 cents. However, the quarterly results were almost 42% above the year-ago profit of 43 cents.
Revenue decreased roughly 4% to $1,848.0 million in the reported quarter from $1,917 million in the year-ago quarter.
Importantly, quarterly cash distribution per common unit was raised to $1.20 ($4.80 annualized), representing a 5% year-over-year growth. The dividend is payable on May 15, 2012. The partnership has now increased the quarterly distribution 43 times since its current management took over in February 1997.
Kinder Morgan’s distribution was fueled by growth opportunities in the midstream energy sector, with more emphasis in the natural gas shale plays as well as in the coal export business.
The partnership’s distributable cash flow — a measure of its ability to make unitholders’ payments — before certain items was $462 million versus $382 million in the comparable quarter last year. Additionally, distributable cash flow per unit before certain items was $1.37, up 13.2% year over year.
Segmental Highlights
Products Pipelines: The business segment experienced a 2.2% year-over-year decline in earnings before DD&A and certain items to $176 million. The lower FERC rates, accompanied by military volumes in its Pacific system and reduced volumes on CALNEV, led to increased expenses, which in turn weighed down on earnings. Total refined products volume was 155.6 million barrels, down 1.6% from the prior-year period.
Natural Gas Pipelines: Earnings before DD&A and certain items from the business grew an impressive 25.1% year over year to $279 million. Performance was aided by Petrohawk’s acquisition of a 50% interest in KinderHawk and improved contributions from the Fayetteville Express Pipeline. Further, Kinder Morgan Treating benefited from the SouthTex acquisition in December of 2011 and subsequent strong plant sales.
Overall, transport volumes moved up 4% from the year-ago quarter, mainly attributable to the start-up of the Fayetteville Express Pipeline system and solid transport volumes on the Texas intrastate pipeline system, partly due to Eagle Ford Gathering volumes.
CO2: The segment’s earnings before DD&A and certain items were $337 million, up 30.6% year over year on higher oil prices, increased production at the Katz Field and higher natural gas liquids (NGL) sales volume.
Terminals: The business segment earned $187 million before DD&A and certain items in the first quarter, up 10% year over year.
Kinder Morgan Canada: The segment reported first-quarter earnings of $50 million before DD&A and certain items compared with $48 million in the year-ago quarter. The income growth was supported by a new toll agreement on the Trans Mountain pipeline, enhanced domestic throughput on the Platte Pipeline as well as favorable book taxes.
Financials
As of March 31, 2012, Kinder Morgan had cash and cash equivalents of $491 million and long-term debt of $12,156 million. Debt-to-capitalization ratio stood at 62.4% (versus 58.7% in the last quarter).
Our Take
Kinder Morgan is one of the largest publicly traded master limited partnerships (MLP) and generally serves as a benchmark for the pipeline MLP group. A focus on fee-based and diversified businesses has enabled the partnership to dilute its business risks.
Recently, Kinder Morgan increased its holding in Battleground Oil Specialty Terminal Company, LLC (BOSTCO) project to 98% following the purchase of an additional 50% stake from TransMontaigne Partners L.P. (TLP). Kinder Morgan, which currently holds an ownership interest in the BOSTCO project, started construction of the first phase in December 2011. Kinder Morgan has executed terminal service agreements and issued letters of intent for most of the capacity.
Other efforts made by KMPto expand its portfolio is acquisition of SouthTex Treaters, a joint venture with Martin Midstream Partners (MMLP) to build a multi-commodity rail terminal in the city of Pecos in west Texas, expansion of storage capacity at its subsidiary Trans Mountain Pipeline’s Edmonton terminal by an additional 1.2 million barrels.
Further, the partnership’s parent company Kinder Morgan Inc. (KMI) in its attempt to expand its resource base, earlier, announced plans to acquire El Paso Corp. (EP) to create the largest natural gas pipeline system in North America. These endeavours position the partnership favorably for the future.
However, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, imbalance between supply and demand for its products, and rising interest rates. As such, we expect the partnership to perform in line with the broader industry and rate it Neutral on a long-term basis. Kinder Morgan currently holds a Zacks #3 Rank (short-term ‘Hold’ rating).
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