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Summary

  • Almost all the business segments of the partnership are showing solid growth.
  • The expansion efforts in different business areas will continue to enhance the revenues as well as cash flows of the partnership.
  • Seasonality in earnings and cash flows explains why the partnership missed on the bottom line estimates.

Kinder Morgan Energy Partners (NYSE:KMP) recently announced its second quarter earnings which received mixed reaction from the market - some analysts were not happy with the results as they believe the partnership's fundamentals are not growing adequately and the future cash distributions might also not be able to grow at the current rate. KMP has been one of the best in the sector when it comes to growing cash distributions - the partnership has been growing its cash distributions at around 5%. There are a few partnerships that can boast such a high growth rate in cash distributions. We do not agree with these analysts and believe that there is no immediate threat to the partnership - in fact, we have explained some growth areas in our previous two articles, which will contribute heavily towards the cash flows growth of the partnership.

A Glance at the Earnings

KMP reported revenues of around $3.57 billion, up 18% and a per unit net income of around $0.43, compared to $1.41 in the same period last year. However, the analysts were expecting revenues of around $3.35 billion with per unit profits equaling $0.58 for the second quarter. This increase in revenues and decrease in net profits, compared to estimated results, is due to the seasonal demand of the partnership's operations. KMP derives a major portion of its earnings from natural gas sales, which tends to rise in the first and fourth quarter of the year, due to which the partnership reported increased revenues in the second quarter. However, the partnership failed to meet the sequential net margin results, which affected the distributable cash flows growth rate in the second quarter, which will be discussed later in this article.

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Source: SEC Filings

Moreover, KMP managed to generate around $1.44 billion through its five business segments portfolio, an 11% increase over the second quarter of 2013. This substantial rise in the segmented revenues is due to the impressive performance by Tennessee Gas Pipelines [TGP], contributions from the Copano Energy acquisition, increased operational throughput at SACROC, and strong results from Products pipelines and Terminals business segments - natural gas segment also reported strong revenue growth.

(click to enlarge)

Source: SEC Filings

Distributable Cash Flows

During the second quarter, KMP increased its distributable cash flows to $561 million, or a $1.23 per unit, compared to $505 million, or a $1.22 per unit in the same period last year. Moreover, the partnership also increased its quarterly cash distributions per common unit to $1.39, or $5.56 per unit annualized, representing a 5% increase compared to the same period last year. However, the sequential growth in cash distributions was a bit disappointing at just 1%. This is due to the increasing number of unit count of the partnership, which resulted in lower sequential cash distributions increase. Nonetheless, the partnership remains on pace to meet or exceed its full-year distribution targets of 95% - 100% to its unit holders.

(click to enlarge)

Source: SEC Filings

Future Growth Prospects

There has been a shift in the U.S. industrial and electric power sector's energy generation methods in the last few years. The industry is moving towards latest environmental friendly and cost-effective natural gas power generation from the conventional coal-fired power generation methods - thus, increasing natural gas demand. KMP is well positioned to benefit from the rising natural gas demand with its natural gas assets. The partnership has an extensive natural gas pipeline network and has been working on several projects to benefit from the situation (you can read a detailed analysis of KMP's natural gas assets here). During the second quarter, the natural gas segment reported revenues of $642 million, up 13% compared to $566 million in the same period last year. This increase is mainly due to the impressive performance at Tennessee gas pipeline [TGP] and contributions from the Copano transaction. Moreover, the natural gas pipeline segment is expected to exceed its targeted growth of 14% for the year. The partnership has been preparing for the rising natural gas demand, which we have discussed in detail in the article linked above.

For many years, the U.S. oil demand has been satisfied by the international supply with high transportation and handling costs. However, the recent shale boom in U.S. is now replacing the expensive international crude with cheaper supplement from the resource rich Bakken and Eagle Ford plays. The increased supply and production has resulted in high demand for terminals businesses across the U.S. Moreover, KMP has an impressive asset base in the Terminals business segments, with majority of its terminals located near high-demand areas. During the second quarter, the partnership reported $227 million as Terminals business revenues, which is up 19% from $191 million compared to the same period last year. This increase in revenues is due to the recent acquisition of American Petroleum Tankers [APT].

Further, the Terminals business is engaged in the marine transportation of crude oil, condensate and refined products in the U.S. KMP ordered several Jones Act qualified vessels which will increase its revenues over the next few years. With the booming oil production in the U.S. and high associated costs with the construction of new pipelines and expansion of already existing pipelines, marine shipment of oil allows KMP a low cost alternative to add more profitability to its books. Moreover, the phase two of the Edmonton Terminal expansion will add an additional 1.2 million barrels of storage capacity - the $432 million project is supported by long-term contracts with major producers and refiners and will be completed in late 2014, adding substantial revenues to the terminals segment. The Terminals segment is also on track to exceed its full year expected growth of 21%.

Conclusion

Despite missing the bottom line estimates, the overall results of the partnership are extremely impressive - almost all the business segments are showing strong growth. Furthermore, the annual growth in cash distributions remains strong. We have highlighted some growth areas in this article and we have also explained the position of the partnership in its business segments in our previous articles. We maintain that KMP remains a solid long-term investment with a considerable potential for capital appreciation and distributions growth.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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Source: Kinder Morgan Energy Partners: Buy For Long-Term Gains