Kinder Morgan Partners (NYSE:KMP) registered a 65% growth in income from continued operations from $291 million to 480 million. However, the net income including the discontinued operations fell 39% from $341 million in Q1 2011 to $208 million in its recently published Q1 2012 earnings. The drop in earnings can be attributed to a $272 million loss from discontinued operations, which was a result of $322 million from fair value losses and $50 million income from operations. These discontinuous operations are primarily relating to assets from acquisition of El Paso (NYSE:EP), which are held for divestiture.
Kinder Morgan is one of the largest midstream companies in Energy sector in North America offering pipelines for refined petroleum products and natural gas, terminals, and provides CO2 for oil recovery. It competes with players like Enterprise Products Partners (NYSE:EPD) and Enbridge Inc. (NYSE:ENB). Lets try to explore trends that impacted the earnings, excluding the effect of extraordinary items.
Highlights of Q1 Continued Operations: Dip in Sales And Improved Margins
During Q1, sales for KMP dropped 3.6% from $1,917 million to $1,848 million. This dip in sales is due to shrinking volumes of refined petroleum products due to stiff competition from other pipelines in some areas and utility companies switching towards cheaper natural gas. Lower FERC rates also caused a dip in realizations from product pipelines division.
On the other hand, it enjoyed sound volume growth in other businesses including natural gas, terminals, CO2 and Kinder Morgan Canada. The overall revenue for the company did fall, but its income from continuing operations grew 65% riding on improved operating margins. Operating margins saw a surge from near 20% to above 30% during this quarter compared to Q1 2011.
Kinder Morgan’s fee based model has worked well and tends to be a source of stable cash flow even if the commodity prices are not stable. The only commodity risk it is presently exposed to is CO2 and it remains sufficiently hedged to avoid any impact on earnings due to fluctuations in CO2 prices. Below we see how volumes impact Kinder Morgan Price estimate.
Our current price estimate for Kinder Morgan Partners stands at $78.24, which is about 6% below the current market price. We are in the process of revisiting our forecasts to incorporate these recent developments.