Kinder Morgan Energy Partners L.P.’s (KMP) third quarter 2013 earnings of 54 cents per limited partner unit (excluding certain items) fell short of the Zacks Consensus Estimate of 60 cents. However, the results improved 5.3% from the year-ago profit of 57 cents.
Revenues increased roughly 31.3% to $3,279 million in the reported quarter from $2,497 million a year ago. Revenues also surpassed the Zacks Consensus Estimate of $3,253.0 million.
Importantly, quarterly cash distribution per common unit was raised to $1.35 ($5.40 annualized), representing 7% year-over-year growth. The dividend is payable on Nov 14, 2013 to unitholders of record as of Oct 31. Including this hike, the partnership has increased the quarterly distribution 49 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 $554 million versus $455 million in the comparable quarter last year. Additionally, distributable cash flow per unit before certain items was $1.27, down 0.8% year over year.
Segmental Highlights
Products Pipelines: The business segment experienced a 9% year-over-year improvement in earnings before DD&A and certain items to $202 million. The upside came from higher revenues from the Kinder Morgan Crude and Condensate (KMCC) and Double Eagle Pipelines; along with higher volumes on the Pacific and Central Florida systems and at the Southeast Terminals.
Natural Gas Pipelines: Earnings before DD&A and certain items from the business grew an impressive 58.7% year over year to $608 million. Drop downs from Kinder Morgan Inc. (KMI) associated with the El Paso acquisition and contribution from the Copano Energy acquisition aided the 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 6% from the year-ago quarter, mainly due to lower natural gas demand for electric power generation.
CO2: The segment’s earnings before DD&A and certain items were $349 million, up 5% year over year on increased oil and NGL production and higher prices.
Terminals: The business segment earned $199 million before DD&A and certain items in the third quarter, up 7% year over year.
Kinder Morgan Canada: The segment reported earnings of $44 million before DD&A and certain items compared with $56 million in the year-ago quarter.
Financials
As of Sep 30, 2013, Kinder Morgan had cash and cash equivalents of $534 million and long-term debt of $18,910 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 Crestwood Equity Partners LP (CEQP) and Energy Transfer Partners, L.P. (ETP) that offer value and are worth buying now. Both partnerships sport a Zacks Rank #2 (Buy).
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