2 Red Flags from Kinder Morgan Earnings

Earnings headlines look okay

“Kinder Morgan Energy Partners Increases Quarterly Distribution to $1.39 Per Unit, up 5%”

“Distributable Cash Flow 11 Percent Higher Than Second Quarter 2013”

But…

A couple of negative items are being overlooked. Here are two red flags that may

put off some buyers.

Red Flag #1

Distributable Cash Flow Per Unit

DCF per Unit

Distributable cash flow was up 11% YOY, that’s great!

Distributable cash flow PER UNIT was up $0.01, which is closer to 0.8% YOY. That’s terrible.

2013$1.22

2014$1.23

Not much growth!

DCF per UnitBig deal, what has it been in the past?

Much, MUCH better:

YOY DCF/Unit Change2014 0.8%2013 14%2012 7.3%2011 6.2%2010 7.1%

DCF per Unit

Kinder Morgan is treading water here. This is something to watch very closely next quarter.

Red Flag #2

Distribution Coverage Ratio

Distribution coverage ratioKinder Morgan loves to “plan to miss” in the second and third quarters of each year. Here’s a look at its Q2 coverage ratio history for the last five years:

20120.87x

20130.92x

20140.88x

20110.88x

20100.97x

Remember this is a number that, in theory, should never dip below 1.0x coverage for a midstream MLP.

Distribution coverage ratioInvestors have been “OK” with this for some time, given KMP has boosted the Q2 distribution by 6%, 7%, and 7% over the last three years.

But distribution growth was only 5% YOY this quarter. Even Enterprise Products Partners managed 6%, and likely with ample coverage (it reports earnings 7/31).

Distribution coverage ratioIn other words, KMP is living paycheck to paycheck and its ever increasing float (>$1 billion issued YTD) is hampering distribution growth.

Its coverage ratio through the first two quarters of this year is exactly 1.00x. Again, something to watch closely in the third and fourth quarters.

Key takeaway

There are better income opportunities out there! If you already own units in Kinder Morgan Energy Partners it

doesn’t make much sense to sell based on last quarter’s earnings, but it doesn’t make much sense to buy either.

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