Editor's note: A previous version of this article stated that KMP has insufficient cash flow to cover its distributions, when in fact management has guided for full year cash flows to cover the distributions.
What a difference a sentence, or even a single word, can make. That sounds like the mantra of an old-time Kremlinologist or a modern day analyst of Federal Reserve statements, but it can apply to a company's earnings statements, too.
To wrap up this brief series on the recent earnings releases from Kinder Morgan Inc (KMI -0.11%) and its family of stocks, let's look at the performance of Kinder Morgan Energy Partners (NYSE: KMP). A slight difference in wording found in this company's two most recent releases tells an interesting tale.
A tale of two statements
Kinder Morgan Energy Partners, a master limited partnership (MLP), is the main driver of Kinder Morgan's profits. The company is a leader in the pipeline transportation and energy storage industries, and owns or operates about 52,000 miles of pipeline and 180 terminals.
Courtesy Kinder Morgan Energy Partners
A comparison of the last two quarterly earnings statements, as summarized in the table below, shows a mixed picture. For the quarter ended June 30, revenue increased by a healthy 19% over the same quarter last year. However, comparing this to the 37% increase for the prior quarter shows a deceleration in top-line growth.
The drop in same-quarter net income growth is not nearly as much of a concern. That's because there was a $558 million gain on remeasurement of net assets to fair value during the quarter ended June 30, 2013, so it's normal for a quarter without such an extraordinary gain to appear much worse by comparison. Margins look healthy and steady from quarter to quarter, and the company isn't drowning in debt by any means.
| Metric | 1Q 2014 | 2Q 2014 |
|---|---|---|
| Same-Quarter Revenue Growth | 37% | 19% |
| Same-Quarter Net Income Growth | -5% | -34% |
| Operating Margin | 26% | 24% |
| Net Margin | 21% | 19% |
| Debt / Equity | 149% | 150% |
| DCF/unit | 1.55 | 1.23 |
| Distribution/Unit | 1.38 | 1.39 |
| Coverage Ratio (DCF/Distributions) | 112% | 88% |
Table data from Kinder Morgan Energy Partners releases
The Zen of Foolishness
What a company doesn't say is sometimes just as important as what it does say. If you see something in a release that seems to require an explanation but the explanation is nowhere to be found, you should start hearing alarm bells.
This is not to say that Kinder Morgan Energy Partners is in imminent trouble by any means, of course. It's a huge player in the midstream sector with growing revenues, healthy margins, and a solid balance sheet. Cash is king, though, and if it stops flowing smoothly, even a healthy body can seize up. Investors should keep a sharp eye on this.
