Kinder Morgan Misses Estimate (CHK) (CPNO) (KMP)

Zacks

Kinder Morgan Energy Partners L.P. (KMP) has reported second quarter 2011 earnings of 30 cents per limited partner unit (excluding certain items). The quarter’s results came in below the Zacks Consensus Estimate of 40 cents and the year-ago earnings of 35 cents.

Revenue increased 2.9% to $2,019.3 million in the quarter from $1,961.5 million in the year-ago quarter.

Kinder Morgan increased its quarterly cash distribution per common unit to $1.15 ($4.60 annualized), representing a 6% year-over-year growth. The partnership has increased the distribution 41 times since its current management took over in February 1997.

The partnership’s distributable cash flow before certain items was $323.5 million versus $322.3 million in the comparable quarter last year. Additionally, distributable cash flow per unit before certain items was $1.01, down 4.7% year over year.

Segmental Highlights

Products Pipelines: The business segment experienced a 3.5% year-over-year decrease in its earnings before DD&A and certain items to $174.8 million, due to weakness in demand from Central Florida Pipeline on a quarter-over-quarter basis and a competing terminal coming into service. Total refined products volume was 165.7 million barrels, down 1.3% from the prior-year period.

Natural Gas Pipelines: Earnings before DD&A and certain items from the business increased 3% year over year to $191.0 million. Performance was aided by the KinderHawk joint venture in the Haynesville Shale along with robust activities in Midcontinent Express Pipeline, Casper-Douglas processing assets and Fayetteville Express Pipeline. However, the growth was partially mitigated by lower volumes and poor performance at Kinder Morgan Interstate Gas Transmission and higher property taxes and expenses at Rockies Express.

Overall, transport volumes moved up 16% from the year-ago quarter, mainly attributable to the start-up of the Fayetteville Express Pipeline system and the Texas intrastate pipeline system.

CO2: The segment’s earnings before DD&A and certain items were $268.2 million, up 11% year over year on higher oil and natural gas liquid prices.

Terminals: The business segment earned $166.0 million before DD&A and certain items in the second quarter, up 4% year over year.

Kinder Morgan Canada: The segment reported second-quarter earnings of $51.4 million before DD&A and certain items compared with $43.9 million in the year-ago quarter. The income growth was supported by a new toll agreement on the Trans Mountain pipeline, greater crude deliveries into Washington and appreciation of the Canadian dollar.

Financials

As of June 30, 2011, Kinder Morgan had cash and cash equivalents of $353 million and long-term debt (including current maturities) of $11,407 million. Debt-to-capitalization ratio stood at 59.7%.

Outlook

Kinder Morgan expects to declare cash distributions of $4.60 per unit for 2011, up 4.5% over $4.40 per unit distributed last year.

Our Recommendation

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.

We appreciate the partnership’s attempt to expand its resource base. We believe the CO2 business is a major growth avenue for Kinder Morgan. Further, the joint venture with Copano Energy (CPNO) and increasing operations in Eagle Ford Shale plus the long-term agreement with Chesapeake Energy (CHK) hold a lot of promise. Kinder Morgan’s purchase of a petcoke terminal is expected to be immediately accretive to Kinder Morgan’s earnings and distributable cash flow as it looks to handle petcoke volumes in excess of 13 million tons by this year end.

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).

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