EP EL Paso Corp. (Holding Co.)

Kinder Morgan Energy Partners L.P.’s (KMP) third quarter 2011 earnings of 44 cents per limited partner unit (excluding certain items) fell short of the Zacks Consensus Estimate of 46 cents. However, the quarterly results were significantly above the year-ago profit of 23 cents.

Revenue increased approximately 6.6% to $2,195.1 million in the quarter from $2,060.0 million in the year-ago quarter.

Importantly, quarterly cash distribution per common unit was raised to $1.16 ($4.64 annualized), representing a 5% year-over-year growth. The partnership has now increased the quarterly distribution 42 times since its current management took over in February 1997.

Kinder Morgan expects its annual distribution to exceed the previously announced $4.60 per unit level, fueled by outstanding growth opportunities in the midstream energy sector, with more emphasis in the natural gas shale plays as well as in the coal export business.

The partnership’s distributable cash flow –– a measure of its ability to make unitholders’ payments –– before certain items was $394.1 million versus $317.9 million in the comparable quarter last year. Additionally, distributable cash flow per unit before certain items was $1.19, up 16.7% year over year.

Segmental Highlights

Products Pipelines: The business segment experienced a 4% year-over-year increase in its earnings before DD&A and certain items to $177.9 million, due to higher volumes on the Cochin pipeline system owing to the surge in demand for both terminal and storage deliveries. However, total refined products volume was 167.0 million barrels, down 0.4% from the prior-year period.

The partnership expects the segment’s annual growth rate to come in below 6%.

Natural Gas Pipelines: Earnings before DD&A and certain items from the business experienced an impressive 31% year-over-year growth to $248.0 million. Performance was aided by the KinderHawk joint venture in the Haynesville Shale along with robust results in Midcontinent Express Pipeline, Casper-Douglas processing margins, Fayetteville Express Pipeline and superior results from the Texas intrastate pipeline system.

Overall, transport volumes moved up 12% from the year-ago quarter, mainly attributable to the start-up of the Fayetteville Express Pipeline system and solid transport volumes on the Texas intrastate pipeline system.

Kinder Morgan anticipates the segment’s annual growth to be considerably above the budgeted 8% due to the acquisition of assets from Petrohawk.

CO2: The segment’s earnings before DD&A and certain items were $286.3 million, up 25% year over year on higher oil and natural gas liquid prices. The partnership expects the segment’s annual growth rate to remain close to the budgeted14%.

Terminals: The business segment earned $180.4 million before DD&A and certain items in the third quarter, up 10% year over year and the annual growth rate is expected to come in slightly below the budgeted10%.

Kinder Morgan Canada: The segment reported third-quarter earnings of $48.5 million before DD&A and certain items compared with $44.0 million in the year-ago quarter. The income growth was supported by a new toll agreement on the Trans Mountain pipeline and appreciation of the Canadian dollar.

The partnership currently expects the segment’s growth rate to come in above the budgeted 6% for 2011.

Financials

As of September 30, 2011, Kinder Morgan had cash and cash equivalents of $271 million and long-term debt (including current maturities) of $12,507 million. Debt-to-capitalization ratio stood at 61.8% (versus 59.7% in the last quarter).

Our Take

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. Earlier this week, the partnership’s parent company Kinder Morgan Inc. (KMI) announced plans to acquire El Paso Corp. (EP) to create the largest natural gas pipeline system in North America. The purchase price, including El Paso’s $17 billion outstanding debt, stands at $38 billion. With a large trail of assets in North America, the partnership remains well positioned for future growth.

The Kinder Morgan-El Paso deal will enhance steady cash flow generation and promise growth for Kinder Morgan Energy Partners, which plans to acquire a significant portion of EL Paso’s natural gas pipeline assets over the next few years at attractive prices. For some several years to come, the average annual growth rate in KMP distributions per unit is expected at around 7%, up 5% annually from the prior estimate on the back of likely dropdowns from this transaction. The deal is also expected to dilute the impact of the partnership’s CO2 oil business and offset a potential slowdown in demand of the refined products.

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).

 
EL PASO CORP (EP): Free Stock Analysis Report
 
KINDER MORGAN (KMI): Free Stock Analysis Report
 
KINDER MORG ENG (KMP): Free Stock Analysis Report
 
Zacks Investment Research