10 Core Stocks: A Kinder Morgan Energy Partners Update

Kinder Morgan Energy Partners (NYSE: KMP  ) has simply kept plugging along -- moving oil, natural gas, carbon dioxide, and similar products around the country.  On the heels of a strong earnings release, its partnership units are up a bit since I profiled them last September. Thanks to those same earnings enabling a cash distribution hike, its higher-priced units still yield a respectable  6.2%, fully covered by operating cash flow.

Kinder Morgan Energy Partners vital stats

Operations The company owns energy pipelines, storage facilities, and oil wells.
Recent Price $72.33
Market Cap $22.7 billion
Trailing P/E Ratio 51.01
Return on Equity, Last 12 Months 19.1%

Source: Yahoo! Finance and Capital IQ, as of Jan. 27.

When it comes to a core stock worth owning, could you really ask for anything more? As it turns out, you just might get your chance at more of the same in the near future.

The general partner re-IPOs
Thanks in large part to the tax and legal complexities involved in running a partnership, Kinder Morgan has long had a convoluted corporate structure. In addition to the limited partner units, there's another publicly traded, deeply intertwined business, Kinder Morgan Management (NYSE: KMR  ) .  Kinder Morgan Management offers an investment in essentially the same operations, but with an IRA-friendlier corporate structure.

As a partnership, there's a general partner stake involved in the Kinder Morgan family, as well. That stake is owned by regular old Kinder Morgan, once publicly traded, but taken private about four years ago. But with leveraged buyout owners like Goldman Sachs (NYSE: GS  ) looking to unwind their appreciated stakes, shares in the general partner are now scheduled to be sold again to the public later this year.

Re-IPOs of companies formerly owned by leveraged buyout agreements can be risky, since the debt acquired to support the buyout can severely hamper a company's future flexibility. That said, founder and CEO Richard Kinder expects to keep a 31% stake in the company. Given that huge vote of insider confidence, and the giant, cash-generating pipeline behind it, Kinder Morgan might be one re-IPO worth looking into owning.

At the time of publication, Fool contributor Chuck Saletta owned shares of Kinder Morgan Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 28, 2011, at 1:15 PM, orangeplug wrote:

    Chuck,

    what are your thoughts on this "Harry Markopolis" style analysis of Kinder Morgan? Basically, it looks like they have proven mathematically that the General Partner of Kinder Morgan is royally screwing over the limited partners. Looking at their last two major pipelines REX and Midcontinent Express, the GP is making out like a bandit, but the LP's won't even make enough for the project to payout. Full document and analysis here:

    http://www.scribd.com/doc/47275190/Kinder-Morgan-Summary-Ana...

  • Report this Comment On January 28, 2011, at 6:33 PM, TMFBigFrog wrote:

    Hi orangeplug,

    That, my friend, is an excellent question. There are a few things, though, that need to be understood:

    First, investors buying limited partner units in any such company needs to realize that they're not buying traditional equity in a stock company. There's no vote in the limited partner units, so you're at the mercy of the general partner. That's not unique to Kinder Morgan, it's a base fact of the partnership corporate structure.

    The one ability you have as an investor in such units is the right to vote with your wallet, and if the GP starts mistreating you, you can sell. If enough partners sell, the GP loses the ability to raise affordable capital through partnership financing.

    I do own shares of Kinder Morgan Management (and have for several years), but I watch the partnership's cash flows and distribution policies carefully. While I consider it a core holding, if it appeared from cash flows and distributions that the GP were trying to pull a fast one on me, I'd sell.

    Second, the Kinder Morgan GP/LP payment split has been known for a long time. That the GP gets the better end off the deal as the partnership grew past certain milestone sizes is not new information, nor is it some sort of "long con" as that article claims. As an investor in what essentially maps to the LP side of the business, I'm looking for a strong distribution that's covered by operating cash flows and has the ability to grow as the company does. That the GP makes out even better doesn't bother me, so long as the GP abides by the split policies in the partnership agreement and doesn't over-extend to the point where those distributions (and potential distribution growth) fail to be covered or materialize.

    Third, the GP itself is planning to be re-offered to the public in the near future. If your concern in owning the LP is that the GP gets the better end of the deal, there'll soon be a real easy solution to that concern.

    Fourth, to be blunt, that article is a very poorly written hit piece that shows a clear misunderstanding of the basic nature of the MLP structure in general or Kinder Morgan in particular. It conflates earnings and cash flow in some really poor ratio analysis, calls the depreciation shield a scam that allows money laundering, misapplies capital accounting principles regarding growth and maintenance (which are parts of doing business), completely ignores the fact that the limited parners see tax benefits from that shield as well, and claims that the 50/50 split of incremental cash flows between the GP and LP amounts to theft, when in fact it has clearly been part of the structure for years.

    If you don't like what the company does or how it finances its operations, you don't buy it. If enough people think that way, the GP loses the ability to finance its growth through sales of additional LP stakes.

    Net, like any investment, Kinder Morgan needs to be watched to assure its leadership keeps to the principles and practices that make it a potentially attractive place to put your capital. Thus far, it appears Kinder and his leadership team are treating their LP investors fairly by the terms of the partnership agreement. If that changes, my thesis will change.

    Until then, or unless valuations become sky high on a cash flow basis, I'm happy to hold on to my Kinder Morgan Management shares. Past performance is no guarantee of future results, of course, and every investment needs to be watched for fundamental business or toxic leadership changes. But if the worst criticism anyone can say is that a Limited Partnership is making its General Partner rich, then my perspective is that it must be doing something right.

    -Chuck

    Disclosure: I own shares of Kinder Morgan Management and have since 2003.

  • Report this Comment On January 31, 2011, at 1:20 PM, oxyfanboy wrote:

    Chuck,

    Sometimes it takes an outsider to see that the emperor has no clothes. It doesn't matter what your business structure is.... borrowing money at 9%, and investing it in 0% return investments like the Rockies Express and Midcontintent Express is not a sustainable business model. Energy analyst clearly demonstrated 2 things. First, that it is impossible for the LP to make a decent return on any accretive capital investment. Second, rather than aligning the interests of the GP and the LP, the IDR actually creates vast incentives for the GP to spend huge amounts of capital on money losing projects and to cram as many costs as possible from opex and sustaining capital into "expansion capital", which is financed by LP equity and LP debt. Every dollar they shift nets them $0.50 pure profit. Finally, the financials clearly indicate that the GP is using these loopholes to his utmost advantage. Chuck...the emperor has no clothes.

  • Report this Comment On January 31, 2011, at 6:12 PM, TMFBigFrog wrote:

    oxyfanboy:

    Once again, the GP/LP split has been known for years and isn't exactly new news. Nor is it a 'con' or 'robbery'. If your primary concern is that the GP makes out like a bandit, the GP is expected to soon be available for public purchase, which makes that arguement rather moot.

    Also, where do you get the data that says the Rockies Express and Midcontinent Express are 0% return investments? Point me to a financial disclosure or actual data-based analysis that shows why that's the case, not some semi-coherent ranting based on poor analysis.

    If the Emperor truly has no clothes, that would make an excellent story and one I'd be happy to write. Remember, I make my money from two sources, my investments and my writing about investing. I'm not above taking the bear case on any company. I even argued against Berkshire Hathaway, for heaven's sake ( http://www.fool.com/investing/value/2007/03/08/dueling-fools... ), and that's generally considered the value investor's equivalent of blasphemy. With real data that says "stay away", I will be happy to write an article that says "stay away."

    Kinder Morgan Energy Partners' recent distribution per LP unit is $1.13, vs. the year ago level of $1.05. That's a 7.6% hike, which is only sustainable if the cash flows are there. A bunch of huge 0% ROI investments would make that ability to pay and raise those distributions go away quickly.

    Based on this presentation last December: http://www.kindermorgan.com/investor/presentations/1207_WF.p... , Kinder Morgan's Natural Gas pipelines currently show a 14.0% ROI. A giant investment at the 0% ROI you're claiming should significantly supress that level going forward. That would be news.

    Kinder Morgan has had detractors at least as long as I've owned shares. Kurt Wulff at McDep, for instance, seems to have a very personal vendetta against Kinder Morgan. And as good as the rest of his analysis may be, his long standing anathema for the Kinder Morgan has caused me to discount the rest of his work.

    Best regards,

    -Chuck

    Disclosure: I still own shares of Kinder Morgan Management.

  • Report this Comment On February 01, 2011, at 1:38 PM, energyanalyst wrote:

    Orange Plug, and Fanboy,and Mr. Saletta,

    Thanks for your interest in our analysis. Chuck, first and formost, I am sorry you felt our analysis was poorly written, though I am not sure how you would know...your question about Rockies Express clearly demonstrates that you probably did not read past the headline. That's fine...we understand how busy you must be. Let me pull out the important bits and walk you through them.

    As you note, the 50/50 IDR at Kinder is nothing new, and it is certainly not a secret. In a static enterprise…one that is not actively growing and spending expansion capital, regardless of how fair, the GP and LP would each be entitled to their share of DCF from the existing assets and the market could value each accordingly. However, in a growing enterprise such as KM, spending $1-2 Billion per year, the mechanics of DCF and the IDR work together to create perverse incentives for the GP.

    Our breakthrough was to look at the IDR through the eyes of a project analysts...something no other analyst, including your bff Kurt Wulff have apparently ever done. Everyone understands the IDR at a corporate level...much ink has been spilled about it. We looked at it at the micro level...how does the IDR affect the economics of an individual project... like drilling an infill well at SACROC or building a $7B pipeline like the Rockies Express?

    Let’s envision a potential expansion capital project requiring a capital outlay in year 1 of $1000, and yielding a positive cash flow of $100 per year (10%) in year 2 through 30. Using our simple example, lets look at the before tax and cost of capital ROI for a few scenarios:

    (Feel Free to open up a spreadsheet and follow along)

    *$ spproximate for simplicity

    1)A standard MLP with no IDR. In this case, the GP would put up $20, the LP would put up $980, and they would share the annual cash flows proportionately to ownership. The GP would get $2 per year, the LP would get $98, and each would receive about a 10% return on their investment.

    2)Now lets look at what happens when we add an IDR of 6%. Each party still puts up the same amount of capital, but now we split the annual cash flow differently. Now the GP gets $6 per year, and the LP gets $94. Intuitively, since the cash available is the same, the ROI will increase for the GP and decrease for the LP. With his share of the cash tripling, it is no surprise to see his ROI increase from 10% to almost 30%...a handsome payout in any economic circumstances. On the LP side, we see the ROI decrease a little to %9.35. Still not too shabby.

    Through these two scenarios, we see that it really doesn’t take too much incentive to keep the GP fat and happy. At 6%, the GP ends up getting a 30% ROI. By now you can probably see where this is going. Just as in taxes, what is important is the marginal IDR, so lets look at our project again using KM’s 50% rate.

    3) Same project, but now, despite only putting up $20 of capital, the GP gets a full 50% of the cash flow, or $50 per year. This generates an annual return of 250% for the GP, while dragging down the LP’s return to 3.25%.

    With a cost of capital of around 9%, this project is a money loser for the LP from the start, yet with his 250% return, the GP has a massive incentive to initiate the project anyway.

    And that, Chuck, is the root problem. The burden of the IDR makes virtually every single expansion project a money loser before it even gets off of the drawing board...yet somehow they do anyway. The mechanics of DCF and the IDR work together to create perverse incentives for the GP...to initiate expansion projects that are unprofitable for the LP. The 2009 10k proves ample proof that the GP is in fact abusing these mechanics.

    The 2009 10k proves ample proof that the GP is in fact abusing this. Page 144 shows equity earnings by investment. Rockies Express has full year earnings in 2009 of $98.5M. That's before any overhead or corporate level interest expense...But we'll be generous and assume those were negligible. Since it is earnings, we assume it includes DD&A of around 100M (3.5B/35 years) but it could be less if they used a 40 or 50 year life. So we get an estimated cash flow off the asset of roughly $200M per year. That's not so great for a $3.5B investment even if you get to keep all of the cash flow. But of course, you don't get to keep it all. Out of the $200M, you have to pay the GP $100M per the IDR schedule, leaving the LP with a mere $100M per year cash flow off of a $3.4B (3.5*.98) investment. But wait... it gets worse. See, half of the project was financed with equity, which has a cost of capital at about 13% per the company. Every share I issue to fund a capital project I have to pay not only an additional $4.6 dividend...I also have to pay the GP additional IDR.

    So lets assume that to fund REX they issued $1.7B worth of shares, we have an effective annual cost of $221M. These costs don't show up on the income statement or the DCF calculation, but they are real costs to the LP who's ownership and share of income has been diluted. This more than wipes out the $100M cash flow, giving the LP a less than 0% return on just about every single expansion project. You can walk through Midcontinent express and reach the same conclusions. If it were public, we would expect the same results from just about every expansion project and aquisition over the past 5+ years.

    Moving on to the investor presentation, slide 17. I am glad you asked because I am very familiar with that slide...it puzzled us for a while as well. You have to dig through the footnotes from the investor presentation, but those returns are for the entity...not the LP, and thus are quite irrelevant to the LP investor. Specifically excluded from those ROI is the GP incentive ($935M) and the real costs of equity financing. These are real costs, and not including them in the ROI is misleading at best, criminal at worst...they clearly mislead even professionals like yourself to think that the LP's returns on KM's capital projects are acceptable. Back

    I'm starting to regret writing an essay, but I do hope you enjoy it. Just focus on the initial revelation....it's impossible to make money when you put up 98% of the cash and only get 50% of the cash flow. Everything else flows from there.

    The sooner you and your colleagues expose this scam for what it is...the fewer tears will need to be shed, and the better the chances the LP has of recovering from the GP in court. Do your readers a solid...read the report in full, verify it, and then tell the world what we have discovered.If you can take on Buffet, you can take on Mr. Kinder no problem.

  • Report this Comment On February 01, 2011, at 5:07 PM, TMFBigFrog wrote:

    energyanalyst,

    Thanks for taking the time to respond -- and, unfortunately, to confirm my suspicion. That analysis on the Rockies Express pipeline makes a very common mistake that led to an incorrect conclusion.

    The mistake in the analysis is looking at 2009 calendar year earnings on the Rockies Express pipeline and comparing that against the total investment cost of the pipeline. To compare what is effectively a very short and partial year of revenue/earnings against the fully sunk project cost will naturally and very much incorrectly make the return on investment look terrible.

    At minimum, such analysis needs one full year of in-service revenues/earnings to make a reasonable calculation, or if that's not available, it should be based on the available full-up-and-running revenue/earnings data, seasonally adjusted and annualized.

    According to the company's 2009 10-K ( http://www.kindermorgan.com/investor/2009_KMP_10K.pdf ), a significant chunk of the pipeline's capacity came online in June, 2009, and the company was still putting the eastern part of the pipeline into initial service as late as November 2009. Additionally, a problem shut down part of that new capacity shortly after launch, delaying its economic use into 2010.

    Also, the real prize in the pipeline is in connecting the gas from the Rockies with the population dense northeast. A key link of that connection, per this page (http://www.hydrocarbons-technology.com/projects/rockies_expr... ) was scheduled to come online in late 2010. Assuming that timeline was kept, the benefits would really start kicking in during 2011.

    Best regards,

    -Chuck

    Disclosure: I still own shares of Kinder Morgan Management

  • Report this Comment On February 02, 2011, at 12:25 AM, hookem2626 wrote:

    Chuck,

    Thanks for the responses. I have a few questions/concerns in addition:

    1. Is it not concerning to you that there is no sustaining capex on the oil production side? They spend $400mm or more a year on oil production activities, yet this is all considered growth. But you will also notice that neither production or reserves are increasing.

    Several upstream MLPs define sustaining capex as the amount required to replace reserves and keep production flat. If KMP would do this, it would decrease DCF by hundreds of millions per year.

    Also, most upstream MLPs have long-lived reserves that are fairly stable, which is not really the case here. Now they are moving on to develop the Katz field. I think this strategy is rather aggressive and not sustainable.

    2. KMP has benefited for many years from interest rate swaps, which have lowered their interest expense/cash interest payments. They have considerably more debt that is variable (through the swaps) than other MLPs. Of course this can go both ways and if rates start rising, do you think KMP will be able to offset this increased interest expense? At 9/30/10, $5.6 billion was at a floating rate.

    3. KMP always seems to run under budget on sustaining capex. For 2010 they were under their DCF budget by $19.0 million and under sustaining capex by $28.1 million. So without cutting sustaining capex, they fall way short.

    In 2009, they were $19.9 million over budget for DCF and $30.2 under for sustaining capex. Without big cuts to sustaining capex, they were short again on DCF.

    All of this can be pulled from their website, but since 2002, cumulatively they are $123.8 million under budget on sustaining capex. So it is more than just delaying it from one year to the next.

    4. Certain items - from 2004 - 2007, they have had a benefit to DCF of $865.4 million from certain items...with $704.7 since 2007. A lot of these certain items are paid with real cash (rate case, environmental). So if you don't hold back any money to cover these, it means borrowing or equity issuances to pay for this. Some of the certain items are appropriate in my eyes, but the increasing amount of "certain items" in the last 4 years should make one pause and think if they are all appropriate.

    5. In the 2009 10K KMP says "Rockies Express Pipeline LLC is the sole owner of the Rockies Express natural gas pipeline system, which began full operations on November 12, 2009 following the completion of its final pipeline segment, Rockies-Express East."

    Now I agree there have been operational issues, but 2010 should give a good estimate of future cash flows (may want to adjust slightly upward), but we won't know until 2010 10K is filed. However, through first 9 months of 2010 REX was not performing very well.

    If KMP was expecting large increases in cash flows, wouldn't that have been mentioned in the 2011 budget 8K filed on December 30, 2010? They specifically mention KinderHawk, Fayetteville, Midcontinent but no REX. Nor is there any mention of future expansion on REX that will increase cash flows past 2011.

    6. I agree that earnings are not the best metric to compare MLPs, but I think the flatout ignore them in general is not wise either. I think one should understand why can KMP distribute so much more than its peers and what are the differences between GAAP income and DCF. An a side note, in old KMP investor presentations on the KMP website, management used to discuss earnings at KMP so they must have believed at one point earnings had validity. This stopped as the gap between earnings and DCF widened.

    I think it is a good exercise to understand why KMP can do this and why none of its peers can replicate. The quick answer is "its an old, mature MLP in the high splits" but I don't think that is enough or the full story.

    In 2004, net income per unit was $2.22. DD&A was $1.67, sustaining capex ($0.60). Total DCF was $3.38, so 70% of DCF from earnings, 50% from DD&A and (20%) from sustaining capex.

    In 2008, 50% of DCF was from earnings, 69% from DD&A and (18%) from sustaining capex.

    In 2010, 33% of DCF was from earnings, 78% from DD&A and (13%) from sustaining capex.

    I personally think the more DCF that comes from earnings the more stable and better overall. This trend has consistently been going down. Sustaining capex has also been decreasing. Both somewhat concerning to me.

    I have much more analysis I can share. You were asking for input on why people may think that KMP isn't as great as most would believe or information for another piece on why to be cautious with KMP.

    Thanks in advance for any responses.

  • Report this Comment On February 02, 2011, at 12:27 AM, hookem2626 wrote:

    #4 should say from 2004-2010...not 2007

  • Report this Comment On February 02, 2011, at 10:49 AM, energyanalyst wrote:

    Mr. Saletta,

    I have to disagree with you about REX. Yes, it was the first full year of operation, but it was still a full year. 2010 had some early operational issues, but does not appear to be much different than 2009 cash flow wise. The 10q's are harder to milk data out of, but on the 2010 Q3, page 48, they give us EBDA...9 months vs. last year. For 2010, REX is actually running $12.1M behind 2009...despite additional line miles they may have put in service.

    But all that really doesn't matter. Because of the burden of the IDR, making REX (or any expansion project) profitable is a futile attempt. Say you are correct, and 2009 and 2010 are not representative years. A 3.5B investment, for a straight player in this industry with a 9% cost of capital, needs to be throwing off an annual EBITDA of at least 15%...or $525M just to see a respectable gross return. DD&A isn't changing....do you see NI quadrupling from 100M per year to 400M per year? I'd bet you a substantial portion of my retirement fund that this will not happen...certainly not in 2011, and most likely never.But, as we demonstrated in our initial post, even if they could somehow quadruple profit and see an almost respectable gross return....that's not relevent to the LP, because he would still only get half of that, or $250M per year. Chuck, I was in this business a long time...there is no getting around it...the burden the IDR places on new capital spending is too great. If the Limited partners had an independent voice...not a single penny would ever be spent on "expansion capital" again until the contract is revised to tie the IDR to profit when it comes to expansion projects. For example...rather than getting 50% of all cash flows, the GP could get 50% of all profits above 15% ROI... or some other qualifier that closes the loophole the GP is currently gaming. Of course, this would destroy the value of KMI...about to go public...just something to think about.

    I think that is particularly striking to look at what happens if NI actually decreases...say to 0. I'm not saying this would happen, but the result is very illustrative of how unjust the IDR is. If income was 0, we could still expect to see a positive cash flow of about $100M per year. Despite having wasted $3.4B LP dollars, the GP would still be entitled to half of that...$50M per year. On their 2% capital invested, that is still a hell of a return on a project the LP would likely lose billions on. And that's the big problem. The GP has a huge incentive to spend LP money on money losing, but cash flow positive projects. He can still make a 70%+ return even though the LP is losing his tail. The facts show that the GP is in fact following these incentives, to the LP's detriment, but the investment community has not caught on to this yet. Our goal is to change that.

    Another thought:

    Everybody wants to point to KM's cash flow. But creating cash flow is incredibly easy when all you have to do is sell shares. Taking REX as an example...the LP contributed approximately 3.4B (3.5*.98) for a cash flow of what looks like 100M per year. They could have accomplished the same thing by putting $3.4B of cash in a safe, then pulling out $100M each year for "distributions." That game would last 34 years. Or...they could just have invested it in treasuries at 3% and distributed $100M per year indefinately. So cash flow is easy to create, and as REX demonstrates, profit is not so easy. The GP's gig seems to be...give me 3.4B, and I'll give it back to you over the next 30 or 40 years. I'll give you a hint...this game can't last much more than 5 or so years before it mathematically fails. A loss of confidence or run on the bank could light the fuse way before that.

    So many have pointed out that it is ok for the GP to profit. We think that's a true statement, but they don't seem to realize that for any asset, the cash flows are finite, and thus the more the GP gets, the less the LP gets. We have estimated sustainable cash distributions from the entire KM enterprise of about $1.5B per year by taking the current DCF of about $2.5B, and decreasing it by $1B to account for a modest capital budget and an expected increase in interest expense. Using KMP's current multiple of about 15, we get an enterprise value of around $22.5B...that's the combined value of both the GP and the LP right now, assuming no more crappy projects, no more selling of shares, and no more debt. Coincidentally, the current market cap of KMP+KMR is 22.5B. If the SEC doesn't suspend KMI's IPO, we'll soon see what the market values KMI at, but we think you can spot the problem. Off the top of my head, we'd split it 60/40, giving us a target price for KMP/KMR of around $40-$45. Ideally, however, we'd like to see the LP rise up and bring the GP to court, ultimately stripping the GP of his entire interest, and essentially leaving the LP whole.

  • Report this Comment On February 02, 2011, at 9:06 PM, TMFBigFrog wrote:

    Fools --

    As great as this conversation has been, these article comment forms aren't the most conducive formats for ongoing discussions. Might I suggest that, should you wish it to continue, that it move to the Fool's free, publicly available board specifically dedicated to Kinder Morgan Energy Partners, here: http://boards.fool.com/kinder-morgan-28983716.aspx .

    To briefly address some of the key points to keep this close to readable:

    1) Rockies Express profit underperformance: Look at the footnotes explaining the drivers -- some of them were potentially preventable, some clearly weren't, and some were hits to profit that didn't affect true cash flow, but none of them scream "the GP is ripping off the LP". Frankly, a big part of me is glad that the company was already large before taking on the Rockies Express project, because a smaller company may not have survived running into some of the issues that hit KMP as well as it did.

    2) Kinder Morgan Energy Partners' distributions have been covered by operating cash flow, not "put money in the safe and take it out" type accounting. Not every quarter has been directly covered, but over the past four reported quarters, operating cash flows have well exceeded distributions.

    3) The company says each 100 basis points (1 percentage point) increase in interest rates will raise annual borrowing costs about $61 million. While it's significant, it'd take a heck of an increase to sink the company's ability to cover its interest expenses. Plus, I'd hope the same financial wizards that entered into those swap contracts have contingency plans to get out of them if they start to cause grief.

    4) I agree that sustaining CapEx needs to be sufficient to cover maintenance CapEx needs. The real question is whether the company has underspent a reasonable budget or overbudgeted to be able to have a comfortable cushion for when things go really poorly.... As an outsider, I don't know the anwer to that question.

    5) I view the ability to deliver energy from energy sources to population centers to be Kinder Morgan's long run sustainable core competency and oil production to be the icing on the cake. Yeah, the oil looks like a money maker right now, but oil wells will deplete faster than population centers will move.

    -Chuck

    Disclosure: I still own shares of Kinder Morgan Management

  • Report this Comment On February 03, 2011, at 8:23 AM, energyanalyst wrote:

    Very Interesting

    http://www.businessweek.com/news/2010-09-16/conocophillips-d...

    Not sure how I missed this, but apparently COP had been trying to sell its 25% stake in REX. They changed their mind last year, due to "lack of interest"

    Well yeah...lack of interest at COP's asking price. As a very general rule of thumb.... assets in this business can be worth around 7x cash flow. So using KM's share of cash flow...$200M, lets assume that COP's share is 100M. Using our rule of thumb, perhaps they could sell it for $700M (assuming of course...no debt). If they are already in it for $1.75B ($7B x 25%) selling would have resulted in a $1.05B loss. Anyone think maybe they decided to hang onto it rather than take a $1B hit to earnings? Yeah maybe. Extrapolating to KM, a $2B loss would wipe out around 5-7 years of profit....which is apparently irrelevant to the patsy's who invest in this stock.

    Chuck...I do appreciate you taking the time to participate in this discussion, but I can't help but think you are missing the big picture... This isn't about Rockies Express, or any particular asset. It's about the burden of the IDR making every single dollar of expansion capital spent a bad investment for the LP. It's pretty simple math really. I just don't know how to paint the picture any clearer.

  • Report this Comment On February 03, 2011, at 10:40 AM, softbay555 wrote:

    Can someone clairfy:

    'GP' == KMR ?

    'LP' == KMP ?

  • Report this Comment On February 03, 2011, at 11:12 AM, softbay555 wrote:

    Anyone care to comment on how KMI will factor into this?

  • Report this Comment On February 03, 2011, at 10:56 PM, TMFBigFrog wrote:

    Hi softbay555,

    KMP represents the limited partner units.

    KMR is an intertwined management company that, by the way it's set up, tries to more or less mimic KMP's distribution behavior but in an IRA-friendlier package. There are also cash flow benefits to KMP from having the KMR shares around, but that's a whole other discussion.

    The General Partner is not currently available for public purchase, but it has filed for a public offering. My understanding is that when it trades, it will go under the ticker "KMI", which is the same ticker it had the last time it was public.

    Hope this helps.

    -Chuck

    Disclosure: I still own shares of Kinder Morgan Management

  • Report this Comment On February 03, 2011, at 11:24 PM, TMFBigFrog wrote:

    energyanalyst,

    I've enjoyed this discussion, but we may simply have to agree to disagree on this one. Of course, that's exactly what makes a market work. Somebody has to sell every share that someone else is buying.

    Before I go, though, I would like to thank you for pointing out that BusinessWeek article. Upon reading it, I had an 'aha' moment that clarified for me what's likely going on with the Rockies Express pipeline.

    In a word -- Fracking.

    Based in part on that article, what looks to me like what happened wasn't a case of anyone trying to rob anyone else blind, but rather a case of a technological change that disrupted the economics of the pipeline at a very inopportune moment.

    Pipelines have huge up front investments, very long lead times, and all sorts of pre-work that has to be done before they can be put into use. Presentations on this one on the Kinder Morgan web site go back to 2005 ( http://www.kne.com/business/gas_pipelines/rockies_express/re... ), which mean the planning likely went backeven further.

    If this timeline is anywhere near accurate: http://www.bayjournal.com/article.cfm?article=3716 , it looks like Fracking really started heating up in mid to late 2008, well after huge chunks of the investments for the Rockies Express pipeline had already been made.

    With the huge drop off in natual gas prices AND the increase in Eastern US locations (like Pennsylvania) producing lots of natural gas thanks to Fracking, the economics likely radically changed for the worse for the Rockies Express pipeline. But by that point, with so much of the investment already made, the marginal benefits of continuing the project probably still outweighed the marginal costs of continuing.

    Additionally, when you add in the additional costs involved in either dismantling what had already been built or in maintaining a completely unused partial pipeline, 'keep on keeping on' may well have been the only rational choice at that point.

    Had Fracking been hugely popular before the Rockies Express pipeline project started, or had Kinder Morgan known Fracking would become that popular that quickly, it may very well have made a different decision. We can't go back in time and undo the decisions made then, nor can any of us perfectly predict the future.

    And of course, with the emerging environmental concerns surrounding Fracking, the method may very well become less economical and more heavily regulated. While that would probably raise the price of natural gas, it would also make the gas produced on the Western side of the Rockies Express pipeline look like a much better deal for those on the East Coast and might improve the pipeline's economics...

    All we can do is hope to make the best decisions we can with the information we have available at the time we make them. But I will tell you this -- as an investor, I'm glad Kinder Morgan was already a large, established pipeline company well before it took on the Rockies Express. Because a major economic shift like Fracking to a huge project like Rockies Express could have mortally wounded a smaller company.

    -Chuck

    Disclosure: I still own shares of Kinder Morgan Management.

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