Kinder Morgan Inc. ( KMI - Analyst Report ) reported second quarter 2012 loss of 13 cents a share from continuing operations, failing to meet the Zacks Consensus Estimate of earnings of 26 cents a share. The quarterly earnings also dropped significantly from the year-earlier profit level of 16 cents.

However, total revenue in the quarter increased almost 11% year over year to $2,166 million. The reported figure failed to reach to our expectation of $2,534.0 million.

Dividend

Kinder Morgan boosted its quarterly dividend to 35 cents a share ($1.40 per share annualized), which is more than a 16% increase over 30 cents declared in the second quarter of 2011.

Management now set a dividend target of $1.40 a share for the current year, which is up from the earlier budget of $1.35 per share. Kinder Morgan expects its dividend per share to increase at an average annual rate of around 12.5% through 2015 from the 2011 dividend of $1.16 per share, following the recently closed acquisition agreement with El Paso.

The company’s growth curve will be driven by its ownership of the general partners of both Kinder Morgan Energy Partners, L.P. ( KMP - Analyst Report ) and El Paso Pipeline Partners, L.P. ( EPB - Snapshot Report ) . Cash distributions per unit for both Kinder Morgan and El Paso general partners surged 7% and 15%, respectively, on an annualized basis.

Operational Highlights

Total expenses stood at $1,873 million, representing a 9.1% increase from $1,716 million registered in the second quarter of 2011.

Operating income came in at $293 million in the quarter, representing a 24.2% rise over the same quarter a year ago. Operating margin was 13.5% in the second quarter compared with 12.1% in the year-ago quarter.

Financials

Cash available for dividend payments was $307 million in the second quarter of 2012, an increase of 83% from $168 million in the comparable period last year. This also came in slightly ahead of the company’s published annual budget.

Our Take

We believe Kinder Morgan will be able to seize attractive investment opportunities in the near term, particularly in the Eagle Ford and Haynesville shale plays. Following the acquisition of El Paso, Kinder Morgan is now the largest natural gas transporter and operator in North America. The synergies, over the long term, are significant as demand for natural gas continues to rise.

However, Kinder Morgan’s El Paso acquisition, while enabling it to shift toward natural gas, has also raised concern amid a sluggish natural gas price environment. Again, the company incurred debt to fund the cash portion of the El Paso acquisition, thus keeping leverage metrics high. Though Kinder Morgan is expected to de-lever over time, we believe it may perhaps take several years to reach investment-grade credit metrics.

The company holds a Zacks #4 Rank, which is equivalent to a short-term Sell rating.