The biggest of all the American midstream players, Kinder Morgan (NYSE: KMI ) , and its related master limited partnerships, reported third-quarter earnings on Wednesday afternoon. These days there are an awful lot of acronyms tossed around on a Kinder Morgan conference call, as the earnings release also encompasses Kinder Morgan Energy Partners (NYSE: KMP ) , and El Paso Pipeline Partners (NYSE: EPB ) .
To help simplify the results, today I'll look at the big picture, focusing on the good, the bad, and the all-important distributions.
Revenue is up! A lot of that is because of a boost from high oil prices, but there are a few more reasons why all of the Kinder Morgan companies improved their numbers for cash available per share or unit. Let's take a closer look at what's driving those numbers.
- As oil production increases across the country, so does the demand for carbon dioxide. CO2 is used in enhanced oil recovery, or EOR, to improve the production results of wells. Kinder Morgan's CO2 business increased by $45 million this quarter, and is up $176 million year to date.
- U.S. coal exports to Europe have reached record highs, part of a trend that has benefited Kinder Morgan's Terminal business. In fact, KMP posted record coal export volumes this quarter. The company's terminal network is positioned well for the increase in exports, as evidenced by the deal it signed with Peabody Energy (NYSE: BTU ) this past July.
- The cheap price of natural gas is driving up the use of the commodity for power generation. Any pipeline system that leads to regions that are switching to nat-gas-fired power plants is going to see increasing volume. This trend is particularly evident in southeastern states and Colorado. The advantage for Kinder Morgan is that its pipeline systems really do cover much of the U.S., which means great potential for reaching future markets.
- The low price of natural gas also encourages producers to try to produce more natural gas liquids, a more lucrative commodity right now. Luckily for Kinder Morgan, it has all the right assets in all the right places. NGL pipeline volumes were up year over year, as were NGL production volumes, which increased 12%.
If management only has good news to report, they're either lucky or lying. There were also several macro-level factors negatively affecting the Kinder Morgan companies this quarter, particularly in its terminals business unit.
- Right off the bat, CEO Rich Kinder listed weak demand for refined products as an issue affecting his companies. CFO Kim elaborated later that the lower volumes, particularly on the West Coast pipelines, are due to the weak demand Kinder mentioned, but also competition from another pipeline. Volumes did increase on its multi-product Cochin pipeline system, which stretches from Alberta down into the U.S. and up into Ontario. Still, Kinder Morgan expects its products unit to come up short of its initial expectations for the year.
- Weak domestic demand for coal affected KMP's terminals segment revenue this quarter. It's no surprise really, as the natural gas boom has begun to escort coal out of the American power generation picture.
- Steel volumes at Kinder Morgan's terminals were also weaker this quarter than in the past. This, combined with weaker domestic coal demand could have really hurt the terminal business segment. However, increased demand for coal exports was able to offset those declines. Third-quarter revenue for the terminals unit was up about $3 million, year over year.
- Natural gas producers have been pulling rigs out of dry gas plays in favor of natural gas liquids all year. As a result, Kinder Morgan systems devoted to dry gas, like KinderHawk in the Haynesville Shale, experienced lower volumes, and subsequently lower revenue.
All three units will increase their distributions this quarter, but the long-term outlook is also strong. Using 2011 as a starting point, management's goal is to increase dividends at KMI by 12.5% each year until 2015, while increasing distributions at KMP and EPB over the same time period by 7% and 9%, respectively. Approaching the end of 2012, all entities are on target to achieve these goals. After the third-quarter increases, KMI's annualized dividend is now $1.44 per share, while KMP's annualized distribution is $5.04, and EPB's is $2.06.
All told, it was a good quarter for Kinder Morgan; some segments suffered, but others boomed, highlighting the importance of diversifying business mix in the midstream industry.
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