Kinder Morgan Energy Partners L.P. (KMP) reported its third quarter results of 23 cents per limited partner unit, significantly below from the year-earlier quarter results of 40 cents and the Zacks Consensus Estimate of 36 cents.
The quarterly results were hurt by several items including lower oil price realizations, REX Ohio property tax issue and poor margins in the Texas Intrastate markets.
Revenue in the quarter increased to $2,060 million from $1,660.7 million in the year-ago quarter and Zacks Consensus Estimate of $2,033 million.
However, Kinder Morgan increased its quarterly cash distribution per common unit to $1.11 ($4.44 annualized), representing 6% year-over-year growth. Kinder Morgan has increased the distribution 38 times since current management took over in February 1997.
The partnership’s distributable cash flow was $317.9 million versus $320.0 million in the third quarter last year. Distributable cash flow per unit before certain items was $1.02 compared with $1.12 per unit in the third quarter of 2009.
Segmental Highlights
Products Pipelines business experienced a 3% year-over-year increase in its earnings before DD&A and certain items that totaled $171.6 million, driven by its solid financial performance at the Pacific pipeline and West Coast terminal operations, accompanied by a surge in ethanol demand. Ethanol volumes increased by 25% year over year to 7.6 million barrels. The partnership said that its annual growth target of 10% may be missed slightly.
Earnings before DD&A and certain items from Natural Gas Pipelines business was $188.9 million, slightly below from the year-ago quarter. Overall segment transport volumes increased 3% compared with the year-ago quarter, mainly due to Midcontinent Express Pipeline coming online.
The CO2 business’ earnings before DD&A and certain items were $229.4 million, up 16% year over year driven by higher oil and natural gas liquid (NGL) prices on unhedged volumes as well as a 5% increase in NGL sales volumes. Kinder expects this segment’s earnings growth to fall slightly short of its previous annual target of 26%.
Terminals business produced third-quarter earnings of $164 million before DD&A and certain items, up 14% year over year. Kinder Morgan Canada reported third-quarter earnings of $44 million before DD&A and certain items compared with $47.7 million in the year-ago quarter.
Outlook
Kinder Morgan is one of the largest publicly traded master limited partnerships (MLPs) 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 and provided it with a stable and steady earnings growth. The 4.8% cash distribution growth in 2010 largely reflects its successful completion of organic growth projects.
We believe the CO2 business is a major growth avenue for Kinder Morgan. A better-than-expected oil production and price environment will likely boost the partnership’s underlying valuation. We currently recommend Kinder Morgan Neutral with the Zacks #3 Rank (Hold).
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