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Kinder Morgan's Upbeat 3Q

KMP KMI

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Kinder Morgan Energy Partners L.P.’s (KMP - Analyst Report) third quarter 2012 earnings of 57 cents per limited partner unit (excluding certain items) were in line with the Zacks Consensus Estimate. However, the quarterly results were 29.5% higher than the year-ago quarter’s earnings of 44 cents per share.

Revenue increased 10.7% to $2,336.0 million in the quarter from $2,111 million in the year-ago quarter and beat the Zacks Consensus Estimate of $2,273 million.

The partnership’s cash distribution per common unit was raised to $1.26 ($5.04 annualized), representing a 9% year-over-year growth. The distribution is payable on November 14, 2012.  The partnership has now increased the quarterly distribution 45 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 $455 million versus $394 million in the comparable quarter last year. Additionally, distributable cash flow per unit, excluding certain items, was $1.28, up 7.6% year over year.

Segmental Highlights

Products Pipelines: The business segment’s earnings before DD&A and certain items climbed 4.0% year over year to $185 million. The higher revenues from the West Coast Terminal; mainly due to earlier-than-expected completion of the Carson project in California and the Southeast Terminals, resulting from two purchases and improved throughput volumes of refined products and biofuels, led to increased earnings. Total refined products volume was 162.7 million barrels, down 2.6% from the prior-year period.

Natural Gas Pipelines: Earnings before DD&A and certain items from the business shot up 54% year over year to $383 million. The performance was aided by the dropdown of TGP and EPNG as well as higher contributions from the Fayetteville Express Pipeline. Further, Kinder Morgan Treating benefited from the SouthTex acquisition in December 2011 and subsequent strong plant sales.

Overall, transport volumes moved up 11% 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, partly due to Eagle Ford Gathering volumes.

CO2: The segment’s earnings before DD&A and certain items were $332 million, up 16% year over year, on the back of higher oil prices, increased yield at the Katz Field and SACROC as well as record natural gas liquids (NGL) output at the Snyder Gasoline Plant.

Terminals: The business segment earned $184 million before DD&A and certain items in the third quarter, up 2% year over year.

Kinder Morgan Canada: The segment reported earnings of $56 million before DD&A and certain items, up 15% year over year. The highlights for the segment during the quarter were a new toll agreement on the Trans Mountain pipeline, enhanced domestic throughput on the Trans Mountain and the Westridge Terminal as well as superior performance of the Express-Platte Pipeline.

Financials

As of September 30, 2012, Kinder Morgan had cash and cash equivalents of $532 million and long-term debt of $15,217 million. Debt-to-capitalization ratio stood at 57.9% (versus 61.6% 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.

Kinder Morgan acquired stakes of TGP as well as EPNG from its parent company Kinder Morgan Inc. (KMI - Analyst Report). This 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 funded the above deal with the funds raised from the divestiture of Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Company, the Casper-Douglas natural gas processing and West Frenchie Draw treating facilities in Wyoming and the partnership’s 50% interest in the Rockies Express Pipeline to Tallgrass Energy Partners, LP.

Recently, Kinder Morgan inked a deal with oil refiner Phillips 66 (PSX) for the transportation of Eagle Ford crude and condensate to the latter’s Sweeny refinery in Brazoria County, Texas.

These deals positioned Kinder Morgan advantageously and ensure stable cash flow to Kinder Morgan and its unit holders going forward.

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

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