By: Ahmed Ishtiaq
The Kinder Morgan family operates the biggest energy transportation network in the country. The group has grown rapidly and rewarded its investors along the way. Different structures of these companies allow different investors to choose the stock which best suits their needs. If an investor is interested in growth; Kinder Morgan Management (KMR) is the best option.
On the other hand, income investors may want to invest in Kinder Morgan Energy Partners (KMP) or Kinder Morgan, Inc. (KMI). Sometimes, the structure of these companies becomes extremely complicated due to the limited and general partner agreements. As a result, investors get confused and face difficulty in making a decision. In this piece, I have tried to shed some light on the relationship between KMP and KMI along with the role of KMR. I shall try to highlight the advantages and the disadvantages of each of these investment options.
Relationship between KMP and KMI
The ownership structure of Kinder Morgan is unique as KMP owns most of the assets. KMP is set up as a master limited partnership, and is one of the largest in the country. KMI is the general partner (GP): The general partner manages day-to-day operations and makes major business decisions. The general partner tries to grow the limited partner's distributable cash flow through different sources. One of the ways to grow cash flows is dropping down assets to the limited partner. Recently, KMI dropped down assets to KMP, enabling the limited partner to increase its distribution. However, KMI did not do these actions for the sake of charity. An increase in the cash distributed to KMP unitholders helps KMI receive higher cash distributions. The Incentive Distribution Rights (IDRs) gives KMI the right to receive higher distributions if the distributions to KMP unit holders cross a certain threshold. Current IDR structure stands like this.
98% of the distributable cash flow goes to the KMP unit holders and 2% to KMI if owners of the KMP units receive $0.15125 per unit in cash or equivalent i-units in a quarter.
85% of the distributable cash flow goes to the KMP unit holders and 15% to KMI if owners of the KMP units receive $0.17875 per unit in cash or equivalent i-units in a quarter.
75% of the distributable cash flow goes to the KMP unit holders and 25% to KMI if owners of the KMP units receive up to $0.23375 per unit in cash or equivalent i-units in a quarter.
50% of the distributable cash flow goes to the KMP unit holders and 50% to KMI if owners of the KMP units receive more than $0.23375 per unit in cash or equivalent i-units in a quarter.
Current KMP cash distributions to the unit holders are far more than the threshold; as a result, the general partner receives over 40% of the distributable cash flow. IDRs give KMI the right to receive 50% of incremental cash flow. Often general partners are criticized for taking a major chunk of distributable cash flows. Kinder Morgan has also faced such criticism; however, investors look happy with the overall performance of the partnership. KMP can buyout its general partner if the partnership feels the relationship is not working between the general and limited partner. If KMP decides to buyout its general partner; it will be beneficial for the KMI investors as KMP will have to pay a premium.
On the other hand, KMP investors may enjoy higher distributions due to the elimination of a cash drain. However, I do not believe KMP needs to merge with the general partner. The partnership has been able to grow per share cash flow at an impressive rate, which should help it maintain its cash distributions. KMP and KMI remain attractive to income investors as both entities have solid cash flows growth and attractive yields.
KMR for Growth
Kinder Morgan Management manages and controls the business units, as well as several other related subsidiaries. KMR shareholders are not paid in cash. Rather, new shares are issued equal to the cash distributed by KMP. KMR payment system works like a dividend reinvestment program. KMR does not own any assets, and its management of KMP assets is the only way of increased returns for its shareholders. KMR has been massively successful since going public and it has rewarded investors handsomely. Furthermore, the El Paso deal will be accretive to cash flows and help increase the cash distributions.
Kinder Morgan is one of the best run businesses in the country. Management has a long history of achieving phenomenal results for shareholders. I expect El Paso to integrate in the business smoothly and become an essential part of the business. Richard Kinder has aligned his interests with the common shareholders of the business, which should bode well for investors. I expect KMP and KMI to continue growth in cash distributions and dividends, respectively. However, KMR will provide a good outlet for growth investors.