Kinder Morgan Energy Partners (NYSE:KMP) is expected to release its Q4 2012 earnings on January 16. The firm has performed relatively well over the last few quarters despite the volatility in the North American energy market, thanks to its diversified and largely fee-based business model. In Q3, the firm reported revenue growth of 10% while operating margins grew by around 45% compared to the previous year on strong performance by the natural gas pipelines and CO2 businesses. Here we provide a brief overview of the trends we will be tracking in each business division and how it could impact the company’s earnings for the quarter.
Natural Gas Pipelines: Acquisitions And Growth In Gas Demand Will Drive Results
The natural gas pipelines business is the firm’s largest in terms of revenues. The division has performed reasonably well over the first three quarters, and we believe performance could be boosted this quarter on stronger natural gas demand. In Q4, gas prices rose by around 10% due to winter demand and rising demand from electric utility companies, which have been transitioning capacity away from coal towards natural gas.
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In Q3, while revenues for the division remained relatively flat, margins grew by over 50% compared to the previous year thanks to a strong performance from the Tennessee Gas pipeline and the El Paso pipeline that the firm acquired from its parent, Kinder Morgan Inc., in August 2012. We believe the acquisitions provide opportunities for the firm in the long run particularly due to the El Paso system’s growing access to the Mexican market and the Tennessee pipeline’s access to the Marcellus and Utica shale plays and connectivity to major cities on the east coast like New York and Boston.
Kinder Morgan Canada: Trans Mountain Volumes And Express-Platte Sale In Focus
Over the last few quarters, Kinder Morgan Canada has witnessed a mediocre performance with revenues and profits remaining relatively flat year-over-year. However, the division could see a better performance this quarter thanks to growing volumes on the company’s Trans Mountain pipeline which connects Alberta to the west coast of Canada and the U.S. Northwest. Shipments through the pipeline were oversubscribed by around 70% in December as petroleum producers from Alberta sought to improve exports to Asia and reduce their dependence on the U.S. market. 
Last month, the firm announced plans to sell its stake in its Express-Platte pipeline system for around $380 million, which we believe was a relatively good deal given that the annual cash flows for the investment were only around $15 million. ((BusinessWire)) We do not expect the deal to significantly impact the performance of the firm’s Canadian operations.
CO2 Business: Increasing Oil Production And Carbon Dioxide Capacity Expansion
The firm’s CO2 business has shown a solid performance though 2012 thanks to higher oil prices, strong oil production and demand for enhanced oil recovery services in the Permian basin in Texas where it primarily operates. In Q3, the division saw revenues and margins increase by around 17% an 16% respectively compared to last year.
Revenues for oil and natural gas liquids could rise this quarter as the firm has been boosting production from the Katz and SACROC fields. On the carbon dioxide front, demand has been good thanks to strong enhanced oil recovery activity in the Permian basin. However, the firm has been struggling catering to the demand and is investing in boosting capacity through expansion and acquisition. However, since the capacity expansion could take up to 3 years in the interim, we believe the firm could have higher pricing power for its CO2 supply business as it has a dominant position in CO2 supplies in the Permian basin. (See Also: The Value Of Kinder Morgans CO2 Business)
Terminals Business: Ability To Capitalize On Coal Exports Will Influence Performance
The firm’s terminals business is involved in transloading (transferring from one mode of transport to another) and storing refined petroleum products and dry and liquid products, including coal, cement and alumina. Middling bulk transload tonnage due to a lower domestic coal volumes and nearly flat liquids volumes resulted in a lackluster performance for the terminals business during the first three quarters of the year. However, we believe that Q4 could see marginally better volumes and revenues on strong thermal coal exports from the U.S. Gulf Coast. Earlier in 2012, the firm signed agreements with Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) to provide terminal capacity for their coal exports.
Products Pipeline Business: Lower Demand For Refined Products Could Impact Results
The products pipeline business transports and stores refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids. The business’ revenue depends on the demand for gasoline, diesel and other products in the areas serviced by the pipelines. Demand for refined petroleum products has been relatively subdued of late and this could impact the division’s performance in the quarter.  During the first three quarters, the division’s performance was a mixed bag with earnings remaining largely flat, with some pipelines like Cochin displaying strong volumes growth while others like the Calnev pipeline displaying a weaker performance.Notes: