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Kinder Morgan Inc. (KMI - Free Report) reported third quarter 2012 earnings of 19 cents a share from continuing operations, failing to meet the Zacks Consensus Estimate of 30 cents a share. However, the quarterly earnings edged past the year-earlier profit level of 18 cents, on the back of its acquisition of El Paso Corp in May.

Total revenue in the quarter increased 35.2% year over year to $2,870.0 million. The reported figure failed to reach our expectation of $2,915.0 million.


Kinder Morgan boosted its quarterly dividend to 36 cents a share ($1.44 per share annualized), up 20% from a payout of 30 cents ($1.20 per share annualized) in the third quarter of 2011.

Management 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. and El Paso Pipeline Partners, L.P. . Cash distributions per unit for both Kinder Morgan and El Paso general partners surged 9% and 18%, respectively, on an annualized basis.

Operational Highlights

Total expenses stood at $2,018.0 million, representing a 15.9% increase from $1,741.0 million registered in the third quarter of 2011.

Operating income came in at $852.0 million in the quarter, representing a substantial 123.6% rise over the same quarter a year ago. Operating margin was 29.7% in the third quarter compared with 18.0% in the year-ago quarter.


Cash available for dividend payments was $362.0 million in the third quarter of 2012, an increase of 93% from $188.0 million in the comparable period last year. The company now expects to generate cash of more than $1,325 million for 2012 for dividend payments, ahead of the company’s published annual budget, mainly due to the El Paso Corporation acquisition.

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. The completion of the El Paso acquisition has enabled Kinder Morgan to leverage the extensive natural gas pipeline network and has given it access to major markets. Gradual dropdown of El Paso’s asset to its partnerships will further add value.

Again, higher exploration and production volumes along with continuous advancement on the Transmountain oil pipeline growth, terminal volume growth and upcoming new projects further enhance shareholder value.

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.

For the longer term, we maintain our Neutral recommendation.

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