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A Closer Look at Kinder Morgan's Earnings

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The biggest of all the American midstream players, Kinder Morgan (NYSE: KMI  ) , and its related master limited partnerships, reported fourth-quarter and full-year earnings on Wednesday afternoon. These days, there are an awful lot of initials tossed around on a Kinder Morgan conference call, as the earnings release also encompasses Kinder Morgan Energy Partners (UNKNOWN: KMP.DL  ) , and El Paso Pipeline Partners (UNKNOWN: EPB.DL  ) . To help simplify the results, today I'll look at the big picture, focusing on the good, the bad, and the all-important distributions.

The good
Sometimes saving money is just as important as making it, and that has certainly been true for Kinder Morgan. The assets it acquired from the El Paso merger are integrating nicely, and the partnership has attained about $400 million in cost savings. But now let's move on to where Kinder Morgan made its money this quarter.

  • Natural gas pipelines earned the most money for the partnership, generating $474 million in fourth-quarter earnings, which is a 64% increase over last year. The growth here is mainly due to higher volumes across its system, though there are different reasons for that. For example, the boom in production in the Eagle Ford shale contributed to higher volumes on its Texas intrastate pipelines, while higher demand for natural gas in power generation boosted volumes on its Tennessee Gas Pipeline system.
  • The second-best performing segment was Kinder Morgan's CO2 business, which grew Q4 earnings 20% over last year, to $337 million. The stellar performance of the SACROC field boosted oil production to more than 30,000 barrels per day. NGL production was also up. The performance of this segment was a bit of a coup for the partnership, as many had expected its CO2-driven oil production to drop off any day now, and it now looks like we won't see a declining production curve any time soon.
  • Kinder Morgan's terminals segment climbed 7% over the fourth quarter of last year, reaching $198 million. The growth here was attributed to higher liquids volumes and better rates obtained through new and restructured contracts, as well as an increase in domestic coal volumes.
  • Products pipelines earned $176 million, a 9% year-over-year increase. There was a decline in refined products demand, but it didn't hurt the segment's overall performance because of higher volumes of NGLs and biofuels systemwide. Volumes of both products rose 22% over 2011's numbers.
  • Kinder Morgan Canada earned $71 million, which was an impressive 38% increase year over year. The results came at the hands of favorable tax strategy and strong performance on its crude-oil pipeline systems: Express-Platte and Trans Mountain. This will be an interesting segment to watch going forward, as Kinder Morgan has sold a one-third interest in Express-Platte to Spectra Energy (NYSE: SE  ) and is awaiting government and local authority approval on its Trans Mountain expansion plan.

It was a great quarter, and an even better full year for Kinder Morgan. All told, in the full year 2012 KMP generated $4.38 billion in segment earnings, which is a 20% jump over 2011's numbers.

The bad
Despite an overwhelming positive quarter, there were still a few things that didn't go Kinder Morgan's way.

  • Refined products volumes were down compared with 2011's fourth-quarter results. This isn't a big surprise, and it didn't hurt KMP too badly, falling 1.2%. Diesel volumes were also down. However, the overall performance of the Products Pipeline segment was up, on higher NGL and biofuels volumes.
  • Kinder Morgan's CO2 business could have had an even better year than it did, but it was hurt by NGL prices, which were 22% lower than budgeted. Again, this decline was mitigated by record levels of production and Kinder Morgan's hedging strategy, so it could've been worse. Ultimately, though, the segment didn't reach its expected target of 26% growth over last year.

Again, most of the downside coming this quarter is only affecting one aspect of one business segment. Kinder Morgan's biggest strength may well be its diversity.

The distributions
All of the Kinder Morgan entities increased their dividends or distributions for the fourth quarter. KMI raised its payout 19% year-over-year to $0.37 per share, while KMP increased its payout 11% to $1.29 per unit. Distributable cash flow was up 8% at KMP, which is running like a well-oiled machine right now.

Foolish takeaway
The future looks bright at Kinder Morgan. KMI expects to drop down the remaining stakes it holds in the El Paso assets to KMP and EPB in 2013. In addition, the partnership has evaluated $12 billion in potential projects and joint ventures that it plans to pursue. This continued push forward will feature a lot of old faces in new positions, as several members of Kinder Morgan's executive staff are stepping down, including longtime president Park Shaper. Continuity should not be an issue, as Shaper will remain on the board, and all vacancies will be filled by long-term Kinder Morgan employees.

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