Earnings for Kinder Morgan Inc (KMI -0.32%) and its family of securities came out yesterday, an occasion which often raises questions among investors. How are these various stocks different, and which one is right for a given investor?
The table below summarizes key points for making an investment decision among Kinder Morgan, Kinder Morgan Management (NYSE: KMR), Kinder Morgan Energy Partners (NYSE: KMP), and El Paso Pipeline Partners (EPB).
| Company | Structure | Assets | Income | Tax Form | Estate Benefits | IRA Account |
|---|---|---|---|---|---|---|
| KMI | C-corp | KMR, KMP, EPB | cash dividends | annual 1099 | none | suitable |
| KMR | C-corp | KMP units | stock dividends | 1099 only on sale | none | suitable |
| KMP | MLP | mixed oil & gas | cash distributions | annual K-1 | basis reset upon death | generally not suitable |
| EPB | MLP | natural gas | cash distributions | annual K-1 | basis reset upon death | generally not suitable |
Table information from Kinder Morgan.
The general partner
Kinder Morgan itself is, of course, at the top of the pyramid, acting as general partner (GP) for the two master limited partnerships (MLPs) and holding a stake in Kinder Morgan Management. As the largest midstream energy company in North America, it owns or operates about 80,000 miles of pipeline and 180 terminals. Kinder Morgan's pipeline network transports crude oil, natural gas, gasoline, and other products, while its terminals store all of these in addition to chemicals, ethanol, coal, and even steel.
The company is a standard corporation, and investors receive taxable cash dividends, receiving an annual 1099 form for tax purposes.
The workhorse
Kinder Morgan Energy Partners owns or operates 54,000 miles of the Kinder Morgan pipeline system, and all 180 terminals. As an MLP, it allows investors to receive tax-deferred cash distributions each quarter. The distributions lower the cost basis of the investment, so investors pay tax only when they sell, or on distributions received after reaching a cost basis of zero. Upon the investor's death however, the cost basis resets, providing a huge tax benefit for estate planning purposes.
So, for investors who want higher current cash income and are planning to bequeath their shares, Kinder Morgan Energy Partners might be the way to go. Investors receive a form K-1 annually for tax purposes, and they may need to deal with complex state tax issues.
The yield spread mystery
An interesting but sometimes overlooked member of the group is Kinder Morgan Management. This company's only substantial asset consists of a large investment in units of Kinder Morgan Energy Partners, so it has essentially the same performance.
There are some big differences, though. For investors who want the high current yield of an MLP without all the complex tax issues, Kinder Morgan Management is set up as a regular corporation. Of course, this means Kinder Morgan Management doesn't have the estate planning advantage that the MLP has.
Courtesy Kinder Morgan.
Finally, Kinder Morgan Management pays dividends in the form of stock, not cash. These dividends are also tax-deferred, lowering the investor's cost basis, so the investor pays tax only upon selling the shares. Since the dividends are not in the form of cash and are not immediately taxable, the investor receives no annual 1099 form. Brokers generate the 1099 form only upon the sale of shares. According to the company, this arrangement effectively performs as a dividend reinvestment plan (DRIP).
A slightly mystifying situation has existed for years regarding shares of Kinder Morgan Energy Partners and Kinder Morgan Management. The quarterly distributions of each, although one is cash and the other stock, have the same value. However, the market has consistently priced shares of Kinder Morgan Management lower than those of Kinder Morgan Energy Partners, giving Kinder Morgan Management a higher yield. One possible explanation is that investors prefer the cash income from the MLP, thus driving its price slightly higher.
At any rate, investors who aren't interested in estate planning or in current cash income, and who want faster compounding of their investment, may want to take a look at Kinder Morgan Management.
The pure gas play
Finally, we arrive at the other MLP in the group, El Paso Pipeline Partners. This company deals exclusively in natural gas assets such as pipelines and interstate gas companies. Its assets also include an LNG storage and regasification terminal near Savannah, Georgia. El Paso's businesses include more than 13,000 miles of pipeline and nearly 100 billion cubic feet of natural gas storage.
Investors interested in all the advantages of MLPs, but who want to invest exclusively in the growing industry of clean-burning natural gas, may find El Paso Pipeline Partners to be the most suitable investment.
Should Fools rush in?
This has been only a general tour of the Kinder Morgan companies, with an eye toward helping investors choose one, given their particular circumstances. Whether or not to invest in Kinder Morgan in the first place is a separate question, so stay tuned for more on that!
