Kinder Shines on Volume Growth

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Kinder Morgan Energy Partners L.P.'s (KMP) fourth quarter 2012 earnings from continuing operations of 75 cents per limited partner unit (excluding certain items) beat the Zacks Consensus Estimate of 67 cents. The quarterly results were also 36.4% higher than the year-ago quarter's earnings of 35 cents per share. The outperformance was mainly attributable to higher volumes in its interstate pipeline network.

The full-year 2012 earnings of $2.31 per unit also exceeded our expectation of $2.23, and improved from the year-ago earnings of $1.72 a unit.

Revenue increased 30.5% to $2,510.0 million in the quarter from $1,923.0 million in the year-ago quarter and beat the Zacks Consensus Estimate of $2,427.0 million.

The partnership's cash distribution per common unit was raised to $1.29 ($5.16 annualized), representing an 11.2% year-over-year growth. The distribution is payable on February 14, 2013.  The partnership has now increased the quarterly distribution 46 times since the current management team took over in February 1997.

Kinder Morgan's payout hike was fueled by incremental contribution from the dropdown of 100% of Tennessee Gas Pipeline (TGP) and 50% of El Paso Natural Gas (:EPNG), growth opportunities in the coal export business as well as robust oil yield.

The partnership's distributable cash flow – a measure of its ability to make unitholders' payments – before considering certain items was $495 million versus $425 million in the year-ago period. Additionally, distributable cash flow per unit, excluding certain items, was $1.35, up 6.3% year over year.

Fourth Quarter Segmental Highlights

Products Pipelines: The business segment's earnings before DD&A and certain items climbed 9.3% year over year to $176 million. The higher revenues from the Cochin Pipeline and Southeast Terminals led to increased earnings. This was accompanied by long contributions from the Kinder Morgan Crude and Condensate Pipeline. Total refined products volume was down 1.2% from the prior-year period.

Natural Gas Pipelines: Earnings before DD&A and certain items from the business shot up 63.4% year over year to $474 million. The performance was aided by the dropdown of TGP and EPNG as well as higher contributions from the June 2012 acquisition of 50% of some midstream properties. Further, Kinder Morgan Treating and the Fayetteville Express Pipeline, along with the Texas intrastates and Eagle Ford assets also contributed to the results.

Overall, transport volumes moved up 6% from the year-ago quarter, mainly attributable to robust volumes on the Fayetteville Express Pipeline system and strong transport volumes on the Texas intrastate pipeline system. Again, higher throughput for natural gas fired power generation on TGP also added to this.

CO2: The segment's earnings before DD&A and certain items were $337 million, up 19.9% year over year on the back of increased yield at the SACROC as well as record natural gas liquids (NGL) output.

Terminals: The business segment earned $198 million before DD&A and certain items in the fourth quarter, up 7.6% year over year. The quarter benefited from its liquids terminals on the Houston Ship Channel and in New York Harbor, increased demand for export coal and increased steel tonnage at Fairless Hills.

Kinder Morgan Canada: The segment reported earnings of $71 million before DD&A and certain items, up 39.2% year over year, reflecting superior performance of the Express-Platte Pipeline and favorable book taxes.

Financials

As of December 31, 2012, Kinder Morgan had cash and cash equivalents of $518 million and long-term debt of $14,714 million. Debt-to-capitalization ratio stood at 56.0% (versus 57.9% 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.

The dropdown of assets, like stakes of TGP as well as EPNG from its parent company Kinder Morgan Inc. (KMI), contributed favorably to the quarter’s results. This move was a part of Kinder Morgan Inc.'s acquisition of El Paso Corp. that entails the divestiture of three U.S. natural gas pipelines.

Kinder Morgan currently expects to invest approximately $11 billion in expansion and joint venture related operations. For 2013, the partnership intends to spend nearly $3 billion in expansion and acquisitions and 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.

However, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, an imbalance between supply and demand for its products and rising interest rates. Such factors can hurt the partnership’s volumes and margins. Again, its distribution growth prospects are closely linked to the successful completion of organic growth projects, which in turn might be adversely affected by operational hindrance, cost inflation and overruns and delays in completion.

Kinder Morgan currently retains a Zacks Rank #3 (short-term Hold rating). Longer term, we maintain a Neutral recommendation on the stock.
 

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