Kinder Morgan Knows What It Needs to Fix

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  (NYSE: KMI  ) 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.

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.

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  • Report this Comment On July 24, 2014, at 2:21 PM, edgetools wrote:

    Author's point was fully answered two days ago by Clayton Rulli (The Naysayers are Barking at Shadows). Mr. Rulli quotes Kinder's CFO on the Q2 conference call as follows [quoting from Clayton Rulli's article]:

    During the Q2 conference call, Kim Dang, CFO and VP explained:

    "And as we tell you every quarter, we expect to have negative coverage in the second quarter and the third quarter, positive coverage in the first and the fourth and excess coverage for the full year. Year-to-date, we are right on top of the declared distribution. We've generated $2.77 and declared $2.77, so flat coverage year-to-date."

    So there you have it; 100% DCF coverage year-to-date despite new unit issuances, and an estimated possible excess coverage for full-year 2014 even after the increased distribution. Forward looking, expect another DCF coverage shortfall for Q3 as planned every year and thus a first 9-month 2014 negative coverage, but then a bountiful Q4 DCF number which will more than compensate for Q3."

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