Kinder Morgan Energy Partners LP (NYSE:KMP) reported its results of operations for Q2 2013 on July 17, 2013. This article focuses on some of the key facts and trends revealed by this report. Given the significant quarterly fluctuations in important business parameters, trailing 12 months (TTM) figures are also reviewed, in addition to the quarterly numbers.
Revenue growth is shown in Table 1 below:
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Table 1: Figures in $ Millions (Except % Change)
The Tennessee Gas Pipeline and El Paso Natural Gas dropdowns from Kinder Morgan (NYSE:KMI), KMP's general partner, enhanced revenue growth. These dropdowns are associated with KMI's acquisition of El Paso Corporation last year.
KMP's term for earnings before depreciation and amortization (EBDA) is "segment earnings before DD&A and certain items." EBDA is one of the important yardsticks used by management to measure its success in maximizing returns to the partners. It is also regarded as an important internal management tool for the purposes of evaluating segment performance and deciding how to allocate resources to KMP's five reportable business segments.
EBDA was also enhanced by contributions generated by the El Paso dropdowns and, to a lesser extent, by the assets acquired as part of the unit-for-unit acquisition of Copano Energy LLC that closed on May 1, 2013. Segment EBDA is summarized in Table 2 below:
Table 2: Figures in $ Millions (Except Per Unit Amounts and % Change)
General and administrative expenses and interest expenses are deducted from the earnings contributed by all five operating segments. "Certain items" are then added or deducted to derive net income, as shown in Table 3 below:
Table 3: Figures in $ Millions (Except Per Unit Amounts and % Change)
The first component of the $338 million gain appearing under Q2 2013 "certain items" in Table 3 is $558 million gain related to re-measurement of KMP's original 50% interest in the Eagle Ford joint venture to fair market value as a result of the Copano acquisition. The second component is a loss related to additional legal reserves attributable to an adverse court of appeal decision denying an income tax allowance on the product pipeline segment's intrastate operations in California. While the first component does not have a cash impact, the second does. However, management does not anticipate the reparations to be paid by KMP will have an impact on distributions.
Distributable cash flow (DCF) per unit decreased vs. Q1 2013, but that is not surprising as the first and fourth calendar quarters typically produce the strongest results. DCF per unit in Q2 2013 compares favorably with the prior-year period. It also compares favorable on a TTM basis, as shown in Table 4 below:
Table 4: Figures in $ Millions (Except Per Unit Amounts and % Change)
KMP increased its Q2 2013 distribution to $1.32 per unit vs. DCF per unit of $1.22. Therefore, coverage in Q2 2013 appears negative. But the Kinder Morgan entities calculate DCF (and consequently DCF coverage) differently than some of the other MLPs I cover with respect to the general partner's share of DCF (see article dated June 2, 2013). Specifically, KMP reports a DCF number that covers only that portion attributable to limited partners. I prefer to look at total coverage ratio, one that includes all sustainable cash generated by the partnership vs. the distributions made to all the partners (general and limited). In addition, negative coverage in the second and third calendar quarters may be offset by excess coverage in the stronger first and fourth quarters.
The press release providing preliminary Q2 2013 results issued by KMP on July 17 does not contain sufficient information to assess the sustainability of the Q2 2013 DCF number. A comparison of reported to sustainable DCF, and calculation of coverage ratios that take into account all sustainable cash generated vs. distributions made to all partners, will have to wait a few weeks until KMP provides the necessary information as part of its quarterly report on Form 10-Q. In the meantime, I look at another cash flow indicator, one that is less susceptible than DCF to subjective interpretations, to help assess KMP's cash generation capability. Operating income, plus depreciation, less interest expense, less maintenance capital expenditures is shown in Table 5 below:
Table 5: Figures in $ Millions (Except Per Unit Amounts and % Change)
Although DCF per unit for Q2 2013 shows substantial improvement over the prior-year period, the cash flow indicator less susceptible to subjective interpretations is down 4% over the same period. Table 6 below adds TTM numbers to KMP's July17 press release that provides a reconciliation of net income to reported DCF for Q2 2013 and Q2 2012:
Table 6: Figures in $ Millions, Except Per Unit Amounts
Table 6 reflects KMP's method of determining DCF. This method is detailed in an article titled "Distributable Cash Flow (DCF)." This article also provides a comparison to definitions used by other MLPs. I find this method of deriving DCF (referred to as "DCF before certain items") complex. It also differs considerably from the method used by other MLPs I cover.
Table 7 below compares KMP's current yield to some of the other MLPs I follow:
As of 07/22/13:
Magellan Midstream Partners (NYSE:MMP)
Plains All American Pipeline (NYSE:PAA)
Enterprise Products Partners (NYSE:EPD)
Targa Resources Partners (NYSE:NGLS)
Buckeye Partners (NYSE:BPL)
El Paso Pipeline Partners (NYSE:EPB)
Kinder Morgan Energy Partners
Williams Partners (NYSE:WPZ)
Boardwalk Pipeline Partners (NYSE:BWP)
Regency Energy Partners (NYSE:RGP)
Energy Transfer Partners (NYSE:ETP)
Suburban Propane Partners (NYSE:SPH)
KMP increased its quarterly distribution to $1.32 per unit (from $1.30 in Q1 2013 and up 7% from $1.23 in Q2 2012). Distributions for the TTM ending June 30, 2013, are up 8.8%. Management projects distributions in 2013 will total $5.33 per unit, up 7% from the $4.98 per unit in 2012. The long-term debt to LTM EBITDA as of June 30, 2013, as calculated by management, was a manageable 3.9x.
I am uncomfortable with KMP's distribution coverage for reasons detailed in a prior report. KMI, which yields ~4.1% but has increased its 2013 projection of distribution growth to 14% over 2012, may be a better alternative.