Edited by Adam Isaac
In my previous article on the Kinder Morgan Partnership (KMP), I assessed the company's ability to maintain its current cash distributions. In this article, I will delve deeper, to explain how this partnership's business model remains successful, as well as its general capital structure. KMP owns or runs about 29,000 miles of pipelines and 180 terminals, and conducts business through five reportable sectors. KMP pipelines transport refined petroleum products, natural gas, carbon dioxide, crude oil and other products. In addition, the terminals stock up chemical and petroleum products, and handle goods such as petroleum coke and steel. Kinder Morgan is also a top manufacturer and carrier of carbon dioxide for improved oil-mending projects. With an enterprise value of over $40 billion, KMP is currently one of the biggest publicly traded pipeline limited partnerships in America.
KMP is a Delaware limited partnership, which was formed in August 1992. KMP common units trade on the New York Stock Exchange, representing limited partnership interest in the company. While common units trade like common stocks, as a partnership, the ownership interest is in shape of units. Kinder Morgan limited partnership units consist of common units, class B units and I-units. Class B units are similar to common units, though they are not traded on the New York Stock Exchange. All of these classes have the same voting power, meaning each class unit represents one vote per unit. KMP is required to pay cash distributions to all of the unit holders within 45 days of the end of each quarter. Common unit holders, class B unit holders and general partners each receive distributions in form of cash, while I-units holders receive additional I-units instead.
KMP tries to preserve a conservative capital structure, financing the expansion capital expenditures and acquisitions with about 50 percent equity and 50 percent debt. In the short term, the partnership funds these payouts with borrowings under its credit facility. KMP only issues long-term debt or equity when the sum borrowed is of an adequate amount to effectively cost balance debt issues, equities, or both. Moreover, with respect to its debt levels, KMP aims to achieve an even debt mixture of fixed and variable interest rates. This variable rate exposure is accomplished through interest rate swaps. It issues long-term fixed rate debts, and then swaps the fixed interest outflows for variable interest payments.
As of December 31, 2011, the total common units of KMP consisted of 216,306,794 units held by third parties, 14,646,428 units held by Kinder Morgan Inc (KMI) and its consolidated affiliates (excluding its general partner), and 1,724,000 units held by its general partner. At the same time, all of its 5,313,400 Class B units were held by a wholly-owned subsidiary of KMI. Meanwhile, all of Kinder Morgan's I-units were held by Kinder Morgan Management LLC (KMR). According to the limited liability company agreement, KMR's activities are constrained to being a limited partner in KMP. Through the joint outcome of the provisions and the clauses of KMR's limited liability company agreement, the figure of outstanding KMR shares and the quantity of KMP's I-units will, at all times, remain equal. Furthermore, the number of I-units given to KMR is based on the amount of cash KMP distributes to the owners of its common units. When additional cash is distributed to common unit holders, KMP issues additional I-units to KMR. The fraction of an I-unit paid per I-unit owned by KMR will have a worth based on the cash distribution on the common units. If additional units are given to the holders of its common units, KMP will issue an equivalent amount of I-units to KMR based on the number of I-units it owns. For example, during the year ending December 31, 2011, KMR received distributions of 6,601,402 I-units. These additional I-units were distributed based on the $4.58 per unit allocated to its common unit holders during 2011.
Kinder Morgan operates with a solid business model. At present, a large proportion of its business is fee-based, which protects it from volatilities in the commodities market. Although the firm is exposed to price volatility to a certain extent, the exposure is not critical. This leaves KMP free to focus on providing fee-based services to clients from a portfolio of bulk and liquids terminal facilities, energy-related pipelines, and carbon dioxide and petroleum reserves. Kinder Morgan has a diversified assets mix and an incredibly well managed commodity risk exposure. The partnership has expanded a great deal in the recent past and continues to do so. Recently, KMP filed an application with the National Energy Board in Vancouver relating to contract terms and tolls of the proposed $4.1 billion expansion of Trans mountain oil pipeline system. The project will increase the capacity from 300,000 barrels per day to 750,000 barrels per day. KMP has a diversified customer base, and none of its customers contributes more than ten percent of its consolidated revenues. These revenues are lent added insurance by the partnership's exceptionally sturdy customer base.
Kinder Morgan has a diverse customer base as well as a diversified business portfolio. The firm has a prudent financial control system and takes sufficient precautions to cover its risks through different hedging techniques. In only a short time, the Kinder Morgan partnership has grown exponentially to become one of the biggest enterprises in the country. Such success is a clear sign of the partnership's managerial efficacy. I strongly believe that the company's long-term business outlook is incredibly bright, and currently expensive-looking stock may appear cheap in the future. Along with its capital appreciation, KMP also offers strong cash distributions, which will surely increase total returns significantly in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.