Kinder Morgan Energy Partners (NYSE:KMP) released its Q1 2013 results April 17, displaying a solid set of numbers. The results were largely in line with our expectations and were driven by a strong performance from the recently acquired Tennessee Gas Pipeline and El Paso natural gas operations, higher coal exports and strong liquids production in the firm’s CO2 business. (Related read: Kinder Morgan Q1 Preview: Natural Gas Pipelines In The Spotlight) Quarterly revenues grew by around 43% over the last year, to $2.66 billion while income from continuing operations grew by around 65% to $794 million. 
Here is a brief overview of the performance of the individual business segments and what we think it could mean for the firm going ahead.
Natural Gas Pipelines: New Assets Are The Star Performers Once Again
The division earnings before depreciation depletion and amortization (DD&A) grew by around 78% year-over-year, to $497 million, thanks to a strong performance by the recently acquired Tennessee gas pipeline (TGP) and El Paso Natural Gas (EPNG). The results were also aided by higher winter demand as well as increased deliveries to Mexico on the Texas interstate pipeline, which resulted in volumes growing by around 7% compared to last year. We believe that the Tennessee Gas pipeline (TGP) and El Paso pipeline will continue to drive growth for the firm in the near term. The TGP has access to some of the largest shale basins such as the Marcellus and Utica shale, and also connects major cities on the East Coast such as New York and Boston. The firm has ambitious expansion plans for the TGP, particularly in the North East around the Marcellus shale region and intends to invest over $900 million in these projects.
The firm said that it would be closing its $5 billion acquisition of Copano Energy sometime in early May. (Related read: Kinder Morgan Makes Deeper Inroads Into Shale Plays With Copano Energy Acquisition) While the management expects the acquisition to be only modestly accretive to 2013 earnings, we believe that the deal is strategically important since it gives KMP access to some of the most promising shale gas plays in the country. According to the U.S. EIA, almost all of the increase in domestic natural gas production through 2040, is expected to come from growth in shale gas production.
CO2 Division: Higher Liquids Volumes Are Offset By Slightly Lower Pricing
The CO2 business posted earnings before DD&A of around $340 million, which was almost flat compared to last year. This is KMP’s only division that is directly exposed to commodity prices. The division recorded stronger oil and natural gas liquids (NGL) production during the quarter, but these volume gains were offset by weaker price realization for both oil and NGL. Realized prices for NGL declined by around 24 percent year-over-year to $46.50 per barrel while the averaged realized oil price declined by around 4% to around $86 per barrel. While WTI crude oil prices were actually stronger over the quarter (around $94 per barrel), hedging limited the firm’s upside.
KMP also provides carbon dioxide (Co2) for enhanced oil recovery from mature oil wells in the Permian basin in Texas. While demand has remained strong, KMP has been facing some capacity constraints and production has plateaued at around 1.2 bcf per day. However, the firm is working on expanding capacity in its Colorado unit from around 1.2 bcf a day to about 1.4 bcf per day by 2014 and also mentioned that it was working on a new source field on the Arizona/New Mexico border that should add an additional 200 million cubic feet a day in supply. (See Also: The Value Of Kinder Morgans CO2 Business)
Kinder Morgan Canada:A Medeocre Performance, But Toll Increases Could Help Future Growth
Kinder Morgan Canada’s earnings before DD&A grew by around 4% year-over-year to $52 million, helped by strong contributions from the recently divested Express-Platte pipeline system and increased deliveries on Puget Sound portion of the Trans-Mountain pipeline. As we had expected, the deliveries on the mainline Trans Mountain system, which connects Alberta to Canada’s West Coast remained strong, but we believe that volumes will flatten out as the available capacity is likely to be almost fully utilized. The pipeline has a daily transmission capacity of 300,000 barrels and KMP intends to boost capacity to around 890,000 bpd by 2017. (See Also: What’s The Value Of Kinder Morgans Trans Mountain Pipeline) In the near term, KMP Canada’s revenues could rise as the firm mentioned that it received regulatory approval for a new three-year toll rate on the Trans Mountain, which should increase shipment prices. 
Terminals: Coal Exports Remain Strong, But Domestic Coal And Steel Weigh Down Results
The firm’s terminals business is involved in transloading and storing refined petroleum products as well as dry and liquid products. The division’s earnings before DD&A remained relatively flat at $187 million. While higher export coal volumes and liquids volumes bolstered the performance of the division, they were offset by weaker domestic coal handling as well as lower petcoke volumes. The firm’s ethanol volumes also declined by around 15% year-over-year as it converted some of its ethanol assets for other uses. KMP handles nearly one-third of total U.S. ethanol consumption. While ethanol consumption in the U.S. showed strong growth between 2001 and 2010, it has been flattening out over the last 2 years. 
We believe that the terminal division’s near-term growth will hinge primarily stronger export coal volumes since KMP has strong terminal capacity in the East Coast and Gulf Coast which is close to a large number of coal mines in the Appalachian region.
Products Pipelines: Cochin Pipeline And Crude And Condensate Pipeline Do Well
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. During the quarter the division’s earnings before DD&A grew by around 14% year-over-year to $200 million thanks to higher volumes on the Cochin pipeline, higher trans-mix volumes and a better performance by the crude and condensate pipeline which began operations last year. While overall products volumes grew by around 3%, deliveries of natural gas liquids saw the sharpest growth, rising by nearly 32% year-over-year.
We have a price estimate of around $91 for KMP which is just ahead of its current market price.Notes: