Kinder Morgan's Brightly Blazing Future

On Wednesday, Kinder Morgan (NYS: KMI) , its master limited partnership Kinder Morgan Energy Partners (NYS: KMP) , and Kinder Morgan Management (NYS: KMR) reported earnings for the first time since the parent company announced that it would ante up approximately $38 billion to acquire its Houston neighbor and fellow midstream (and exploration and production) company El Paso (NYS: EP) .

Lest I've confused you already with the above bevy of tickers, there's effectively a clear tutorial written not long ago by my Foolish colleague Aimee Duffy that will simplify the indicated relationships nicely. In a moment, I'll return to the current status of the pending acquisition. But first, as Kinder Morgan founder and CEO Richard Kinder noted on his company's call following its earnings release, "Kinder Morgan Energy Partners ... is the driving force in the Kinder Morgan story." For the most part, then, with clarity in mind, I'll focus on the limited partnership and its operations.

The latest results, partner
For the quarter, the partnership posted net income of $475 million, or $0.51 per share, compared with $409 million, or $0.42 per share, in the final quarter of 2010. If you're keeping track, that's a 16.1% increase on the net income line. Revenues for the most recent period were very slightly in excess of $2 billion, or 4% higher than the comparable quarter a year earlier. Analysts who follow the company had anticipated earnings of $0.61 a share on estimated revenues of $2.38 billion.

As Mr. Kinder also noted, "KMP had a solid fourth quarter and a very successful year overall. We will distribute $4.61 per unit for the full year, exceeding our annual budget of $4.60 per unit and representing an increase of almost 5% from the 2010 distribution per unit." He also stated that cash generated in excess of the distribution target reached $21 million for the year.

Steady as she goes when commodities bounce
As a midstream company, Kinder Morgan is largely a pipeline operator that generates its revenue by transporting natural gas, liquids, and products from their points of production to their markets, refineries, or other destinations. In this company's case, those operations involve more than 37,000 miles of pipelines that stretch across North America. Revenues are generated by transmission rates, which are set by the Federal Energy Regulatory Commission. As a result, they're less likely to fluctuate severely with changes in commodity prices than is the case with the output of exploration and production companies.

Looking at the company's operations, i.e., Product Pipelines, Natural Gas Pipelines, CO2, Terminals, and Kinder Morgan Canada, only the first unit experienced a decline in earnings before DD&A in the quarter. For the full year, all five of the segments increased their results over those generated in 2010.

Painting a bright picture
Looking ahead, Mr. Kinder stated, "I think we have a tremendous opportunity for future growth in our set of businesses, and that opportunity is really pretty diverse in nature." He also noted anticipated benefits from the continued emergence of natural gas shale plays, along with associated liquids production, growth in CO2 and export coal demand, and calls for refined products, such as diesel on the Gulf Coast and gasoline in the Northeastern United States.

For 2012, the limited partnership expects cash distributions of $4.98, up 8% from the $4.61 that will ultimately be paid for 2011. In addition, management expects the partnership to generate cash flow exceeding distributions of more than $70 million.

The year's biggest marriage
As noted, Kinder Morgan has agreed to buy El Paso for $21.1 billion, plus debt, making for a total cost of about $38 billion. The anticipated results for 2012 do not include contributions from the merger, which, regulatory authorities willing, is expected to be approved during the second quarter of the year.

Once all approvals are received, Kinder Morgan will assume control of El Paso's midstream and E&P assets, and will essentially sell the midstream assets to KMP and El Paso's pipeline MLP, El Paso Pipeline Partners (NYS: EPB) . At the same time, given the debt that will be incurred with the acquisition, the E&P operation will be divested for what is likely to be at least $7 billion. The U.S. E&P assets are concentrated in the Eagle Ford shale of South Texas, the Haynesville shale in Texas and Louisiana, the Gulf of Mexico shelf, and the Rocky Mountains. In addition, international assets are located in Brazil and Egypt.

Foolish bottom line
Along with having undertaken the industry's major merger of 2011, Kinder Morgan is involved in several projects that will further expand the company's size and scope. Included are a condensate processing facility near the Houston Ship Channel, along with a group of oil storage plants near its terminal in proximity to Alberta, Canada's oil sands.

Given its history of achieving significant growth since its start-up 15 years ago with $40 million in pipeline assets acquired from Enron, its unusually capable management team, and the synergies that will arrive with the pending El Paso acquisition, I fully concur with Aimee Duffy's opinion that Kinder Morgan is "a great pick for the future." I urge Fools who recognize the significance of the rapidly changing energy segment to keep close tabs on this solid and rapidly expanding company, ideally by adding it to your version of My Watchlist.

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At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of El Paso Pipeline Partners. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article. The Motley Fool has adisclosure policy.

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