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KMP Earnings Fall Short of Estimate

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Kinder Morgan Energy Partners L.P.’s second quarter 2013 earnings of 49 cents per limited partner unit (excluding certain items) fell short of the Zacks Consensus Estimate of 61 cents. However, the quarterly results were almost 32.4% above the year-ago profit of 37 cents.

Revenues increased roughly 50.1% to $3,017.0 million in the reported quarter from $2,010 million in the year-ago quarter. Revenues also surpassed the Zacks Consensus Estimate of $2,720.0 million.

Importantly, quarterly cash distribution per common unit was raised to $1.32 ($5.28 annualized), representing 7% year-over-year growth. The dividend is payable on Aug 14, 2013.  The partnership has now increased the quarterly distribution 48 times since its current management took over in Feb 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 coal export business.

The partnership’s distributable cash flow –– a measure of its ability to make unitholders’ payments –– before certain items was $505 million versus $366 million in the comparable quarter last year. Additionally, distributable cash flow per unit before certain items was $1.22, up 14.0% year over year.

Segmental Highlights

Products Pipelines: The business segment experienced an 8% year-over-year improvement in earnings before DD&A and certain items to $179 million. The upside came from higher Transmix volumes as well as higher ethanol and butane blending revenues. Total refined products volume was 170.1 million barrels, up 3.5% from the prior-year period.

Natural Gas Pipelines: Earnings before DD&A and certain items from the business grew an impressive 137.8% year over year to $566 million. Drop downs from Kinder Morgan Inc. (KMI - Free Report) associated with the El Paso acquisition and contributions from the Copano Energy acquisition aided the year-over-year growth.

Earlier in May, Kinder Morgan acquired Copano a midstream entity with operations mainly in Texas, Oklahoma and Wyoming. Prior to that, Copano unitholders approved the transaction, with more than 99% of the units casting votes in favor of the transaction.

This Copano acquisition facilitated Kinder Morgan to pursue development activities in the prolific Eagle Ford Shale areas of South Texas and also allowed entry into the Barnett Shale Combo in north Texas as well as the Mississippi Lime and Woodford shales in Oklahoma.

Overall, transport volumes declined 5% from the year-ago quarter, mainly due to lower power plant gas demand.

CO2: The segment’s earnings before DD&A and certain items were $351 million, up 10% year over year on higher oil prices and increased production at the Katz Field.

Terminals: The business segment earned $191 million before DD&A and certain items in the second quarter, up 5% year over year.

Kinder Morgan Canada: The segment reported earnings of $50 million before DD&A and certain items compared with $52 million in the year-ago quarter.


As of Jun 30, 2013, Kinder Morgan had cash and cash equivalents of $656 million and long-term debt of $17,338 million.

Our Take

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. Kinder Morgan Inc., one of the largest mid-stream energy companies in the U.S., owns the partnership’s general partner interest.

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).

Meanwhile, there are certain other energy pipeline operators like Enbridge Energy Management LLC (EEQ - Free Report) and Rose Rock Midstream, L.P. that offer value and are worth buying now. Both partnerships sport a Zacks Rank #1 (Strong Buy).

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