Kinder Morgan's Profit Up - Analyst Blog

Kinder Morgan Energy Partners L.P. (KMP) reported adjusted fourth quarter earnings of 46 cents per limited partner unit, well above the year-earlier quarter's results as well as the Zacks Consensus Estimate of 42 cents. The quarterly results were driven by increased oil prices and expanded natural-gas pipeline network.

Revenue in the quarter increased to $1,926.6 million from $1,910.9 million in the year-ago quarter. However, the quarter's figure was well below the Zacks Consensus Estimate of $2,085 million.

Kinder Morgan increased its quarterly cash distribution per common unit to $1.13 ($4.52 annualized), representing an 8% year-over-year growth. The partnership has increased the distribution 39 times since current management took over in February 1997.

On a comparative note, Enterprise Products Partners L.P. (EPD) declared a 5.4% year-over-year increase in its distribution to 59 cents per common unit for the fourth quarter of 2010.

Kinder Morgan's distributable cash flow was $366.2 million versus $341.8 million in the fourth quarter last year. Additionally, distributable cash flow per unit before certain items remained flat at $1.17 on a year-over-year basis.

Segmental Highlights

Products Pipelines business experienced a 4% year-over-year increase in its earnings before DD&A and certain items to reach $170.9 million, driven by its solid financial performance at the Pacific pipeline as well as the Southeast and West Coast terminal operations.

The result was partially offset by lower volumes on the Cochin Pipeline system owing to milder weather and a lack of grain drying demand. The result was also accompanied by a surge in ethanol demand. Ethanol volumes increased by 19% year over year to 7.6 million barrels.

Earnings before DD&A and certain items from the Natural Gas Pipelines business jumped 7% year over year to $242.6 million. Overall, transport volumes increased 9% from the year-ago quarter, mainly attributable to the Midcontinent Express Pipeline and Kinder Morgan Louisiana that came online during the fiscal year.

The CO₂ business' earnings before DD&A and certain items were $241.5 million, up 6% year over year driven by higher oil and natural gas liquid prices on unhedged volumes.

The terminals business produced fourth-quarter earnings of $172.6 million before DD&A and certain items, up 11% year over year. Kinder Morgan Canada reported fourth-quarter earnings of $48.7 million before DD&A and certain items compared with $40.6 million in the year-ago quarter.

Outlook

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 and enjoy steady earnings growth.

We believe that Kinder Morgan is well positioned for growth going forward. The partnership highlighted that it expects to distribute almost $1.5 billion to its limited partners and generate over $3.6 billion in segmental earnings before DD&A in 2011.

Importantly, Kinder Morgan expects cash distributions of $4.60 per unit for 2011, a 4.5% increase from the year-earlier level.

We believe the CO₂ business is a major growth avenue for Kinder Morgan. Better-than-expected oil production and price environment will likely boost the partnership's underlying valuation. We currently recommend Kinder Morgan as Neutral on a long-term basis. Kinder Morgan holds a Zacks #3 Rank (short-term ‘Hold' rating).