Kinder Morgan, Inc.: The Positives and the Negatives

May.26.11 | About: Kinder Morgan, (KMI)

I have taken a position in Kinder Morgan (NYSE: KMI) because of Richard Kinder's track record with Enron, KMI, KMR, KMP. KMI owns the general partner and 11% of Kinder Morgan Energy Partners (NYSE: KMP). Kinder Morgan Management (NYSE:KMR) shares are legally pari passu with KMP shares. KMP receives distributions in cash. KMR receives distributions in the form of shares. Both have their unique benefits within specific types of investment portfolios. KMR has historically traded at a discount to KMP, which can be an attractive proposition.

KMI Positives:

  1. The management team has proven to be first class in returning consistent recognized returns.
  2. The company can attract top employee talent at all levels of the enterprise.
  3. Kinder Morgan has access to capital markets for further growth initiatives.

KMI Negatives:

For years, Kinder Morgan has repeated their "we are all shareholder" mantra. Why then did they go privative in 2007 and reissue KMI in 2011? Richard Kinder and the investment banks made their money by taking the the 2007 KMI private and now bringing the IPO-KMI back to the capital markets. If Kinder wanted the company for himself, he could have kept it private. To bring it back on the public markets after 4-years doesn't have a warm and fuzzy feeling to it. Richard Kinder retains a 30% stake in KMI. Investment banks retain a significant ownership in the present day KMI.

KMI Valuation:

KMI's 2011 distribution goals are $1.16 per share. A 4% yield with likely dividend increases in the future make this a compelling purchase. KMI will receive 98% of cash from KMP. The remaining 2% derives from a 20% ownership in NGPL, a natural gas pipeline. A future 5% increase in KMP distributions will equate to a 10% increase in KMI distributions. As general partner, KMI will benefit via the attractive growth markets available to KMP.

KMI Conclusion:

I purchased KMI with mixed feelings. My views are jaded because Richard Kinder has successfully delivered positive returns to shareholders via KMI, KMR, KMP. Some have suggested the accounting is not as crystal clear as it could be. Analysts such as Kurt Wulff have always suggested Kinder Morgan valuations were not as transparent as they could be. Maybe Richard Kinder and Kurt Wulff will never see eye-to-eye.

I simply want to make money in a conservative fashion and not have any surprises.

Disclosure: I am long KMI.