MLP Management LLCs
Kinder Morgan Management, LLC and Enbridge Energy Management, LLC are two uniquely structured entities within the broad MLP space. They both pay dividends in additional shares based upon the distributions of their underlying Master Limited Partnerships (MLPs), Kinder Morgan Energy Partners, LP (NYSE:KMP) and Enbridge Energy Partners, LP (NYSE:EEP), respectively, divided by the average market price of KMR and EEQ shares for the 10 day trading period immediately prior to their ex-dividend dates. KMR and EEQ have the same business model risk profiles as their underlying MLPs and the same investment pros and cons adjusted for the additional benefits discussed below.
KMR was the first to go public, pricing on 5/14/01 at $70.41 (not split adjusted) which was a 1.4% discount to the closing price of KMP on the same day (KMR Prospectus). EEQ was second and priced its IPO on 10/10/02 at $39 (not split adjusted) which was a 6.8% discount to EEP's closing price that day (EEQ Prospectus). Here's how their premiums/(discounts) have compared since 1/2/03:
- They do not generate the somewhat dreaded K-1 tax form, in fact there should be no tax impacts until you actually sell some of your shares. Your tax basis in the shares also does not get adjusted downwards over time (which happens in the underlying MLPs).
- Both can be held in IRAs without any potential adverse tax issues.
- Stock dividend payments are effectively Auto-DRIP plans which allow you to compound your investment value over time tax free and also to effectively buy more shares when market prices are lower without even thinking about it (like during the total vomit comet meltdown from 2008-2009).
Here's how a $10,000 investment in each on 1/2/03 has performed:
The power of compounding a yield driven investment tax free over time is a long term investor's best friend. KMR's compound annual return over the time frame shown has been ~18% and EEQ's has been ~14%. Sadly KMR and EEQ are the only investment choices like this in existence. (Dear Energy Investment Bankers, please go and pitch the i-unit/i-share structures relentlessly to all of the larger MLPs, thanks in advance.) In the above chart, the tax basis of both investments is still $10,000 today (the example did not include a transaction cost at inception and also allowed partial shares at inception to fully invest exactly $10,000 for comparative purposes).
KMR's Discount to KMP is a Gift
As shown in the first chart, KMR has continued to trade at a varying discount to KMP, while in comparison EEQ is trading at a slight premium to EEP. This discrepancy does not make sense. The additional benefits of these structures argue for some kind of consistent small premium over the underlying MLP unit price. Furthermore, the KMR discount is also a compounding benefit over time since the amount of the KMR stock dividend is based on the KMP quarterly distribution divided by the KMR stock price, meaning you will effectively get more shares in KMR while it continues to remain at a discount to KMP and thus compound your investment at a slightly better rate (note the better relative performance of KMR vs. EEQ over the period shown). Kinder Morgan's excellent management team must have a similar view since they have been buying KMR shares at a faster rate than KMP units (please see page 7 of this presentation).
Both KMR and EEQ are the most tax efficient ways to compound an investment in the MLP space with KMR currently representing a better value since it is trading at a discount to KMP.
Additional disclosure: I also have open good 'til cancelled limit orders for KMR and EEQ in case of any sudden flash crashes (come on high frequency algo computers please pick on these two one day for me). I may add to any of my positions at any time over the next 72 hours and I am eagerly awaiting the additional KMR and EEQ shares that I will receive in August (along with all my cash distributions from other positions as well). I am an extremely biased fan of MLPs and probably obsess about them everyday.