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A Closer Look at Kinder Morgan's Q1 Earnings

By Aimee Duffy - Apr 19, 2013 at 7:32PM

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What went down at KMI and KMP during the first quarter.

Kinder Morgan (KMI 1.19%) and Kinder Morgan Energy Partners (NYSE: KMP) reported earnings Wednesday evening. KMI beat expectations on revenue, earning $3.06 billion, and missed on EPS, reporting $0.28 per share. KMP beat on revenue and EPS, earning $2.66 billion, and recording $0.66 per unit. Distributable cash flow was up at KMP, coming in at $550 million compared to $462 million a year ago.

It was a successful quarter from a mile up; now, let's take a closer look.

Segment review
Coming off of 2012, we know all of Kinder Morgan's segments improved on a year-over-year basis. The same cannot be said of the first quarter, as the terminals segment was flat year over year, and the CO2 segment grew by a mere 1%. Let's take a closer look at the individual segments, beginning with terminals:

  • First quarter earnings for terminals came in at $187 million. Kinder Morgan initially expected this segment to see growth of 12% this year, but now expects to come up just shy of that. Refinery shutdowns and declining steel volumes hurt the segment, as did the continuing decline in demand for domestic coal. CEO Rich Kinder reaffirmed on the conference call that this segment will see growth this year, and will not remain flat as it did this quarter.
  • The CO2 segment grew 1% year over year, generating $340 million, and management now expects slightly more than 5% growth in this unit by the end of the year. Oil production looked good this quarter, and natural gas liquids production set records. The problem was commodity prices. NGL prices were 24% lower than they were last year, and the WTI-Midland to Cushing spread didn't help Kinder Morgan's oil sales, either. While that situation has corrected (read more about it here), NGL prices remain soul-crushingly low right now. Additionally, a percentage of production in this segment is hedged, and the realized prices for oil and NGLs this quarter were both significantly lower than last year.
  • The Kinder Morgan Canada segment grew 4% and generated $52 million in earnings. The growth came from the strong performance of the Express-Platte system, which the partnership has since sold. The sale of Express-Platte means Kinder Morgan won't meet its estimated annual budget for this unit. However, the future remains bright after Canada's National Energy Board approved a new three-year toll agreement for the Trans Mountain line, which takes effect in 2015.
  • The products pipelines segment generated $200 million, an increase of 14% year over year. With the exception of diesel, volumes were up across the board. This is impressive, given the slowing demand for refined petroleum products in the U.S. right now. More specifically, NGL volumes increased 32%, and revenue increased 56%. Biofuel volumes were up 20% year over year. The segment also benefited from higher transmix volumes coming from the Kinder Morgan Crude and Condensate pipeline. Transmix is just what it sounds like, a mix of transportation fuels, like gasoline, diesel, and jet fuel.
  • Finally, we have the natural gas pipelines segment. Low natural gas prices have wreaked havoc on plenty of companies recently, but Kinder Morgan is not one of them. Kinder Morgan, Inc. has just about finished dropping down all of the assets it held after last year's acquisition of El Paso, which means that earnings in this segment have jumped 78%, to $497 million. Outside of the dropdowns, volumes are up on the Eagle Ford lines, as well as the intrastate lines that deliver gas to Mexico .

When it's all said and done, it was a great first quarter for KMP.

Foolish takeaway
Kinder Morgan is a giant company that is firing on all cylinders right now. What I like about it specifically, however, is the built-in diversity that its business operations provide to investors. If these companies aren't on your Watchlist, they should be.

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