Kinder Morgan for Beginners

As an energy writer, I've written many, many articles about Kinder Morgan. Today I'm going to focus specifically on the four companies as investment vehicles, rather than discussing the history of the company, leadership, mergers, acquisitions, and future outlook. Today's discussion is all about structure and how these companies can work for your portfolio.

The pieces
When we say "Kinder Morgan," we're referring to an organization made up of four publicly traded entities: Kinder Morgan, Inc. (NYSE: KMI  ) , Kinder Morgan Energy Partners (NYSE: KMP  ) , Kinder Morgan Management (NYSE: KMR  ) , and El Paso Pipeline Partners (NYSE: EPB  ) . These four stock tickers represent three different business structures: KMI is a corporation, KMP and EPB are master limited partnerships, and KMR is a limited liability company. For the sake of clarity, I'll refer to each entity by its ticker symbol.

Kinder Morgan, Inc.
Think of KMI as the figurehead. It sits atop this web of entities and is more or less an organizer of the family business. Money comes in, money goes out, and deals are made, but most of the time KMI doesn't actually own any assets.

Instead, KMI is the general partner in the MLPs that do own the company assets. KMI's general partner stake in KMP is 2%, and it's 2% in EPB as well. KMI also owns 11% of the limited partner units in KMP and 42% of those in EPB. On top of that, it receives incentive distributions from both entities. It also has a 13% stake in KMR, so it receives shares of that segment as well.

When it's all said and done, KMI derives 95% of its cash flow from KMP. Once all the money is collected and taxed, KMI pays a dividend to shareholders. Stakeholders don't need to do anything special here, as KMI is a stock just like any other stock, and its dividends are just like any other. That flexibility is appealing to some investors.

One thing to note: I say KMI doesn't own any assets most of the time, because, naturally, there are exceptions. After Kinder Morgan's acquisition of El Paso, KMI took ownership of all the new assets and slowly began dropping them down (industry-speak for selling) to KMP and EPB. Right now, KMI still owns 50% stakes in five assets, which it plans to drop down to KMP and EPB by 2014. After doing so, it will be a pure general partner once again.

Kinder Morgan Energy Partners
Essentially, KMP does all the work. It holds almost all of the assets in the Kinder Morgan family and therefore generates almost all the cash.

Because it's structured as a master limited partnership, it pays out almost all of that hard-earned cash to unitholders, and it doesn't pay taxes. That's why its yield is so high, and also why unitholders have to file a K-1 form come tax time. If you own KMP units, you are effectively a partner, and each partner must pay taxes because the partnership-entity doesn't.

My Foolish colleague Dan Dzombak penned an MLP guide in 2011, and it remains one of the clearest resources I've seen for investors trying to get a handle on what exactly it means to hold an MLP. There are certain things KMP and EPB unitholders -- or prospective unitholders -- need to know, such as how distributions are taxed immediately once your cost basis hits zero, and Dan's article helps a lot.

El Paso Pipeline Partners
EPB works much the same way KMP does, paying out the bulk of the cash it generates to KMI and unitholders. It is smaller than KMP and its assets are important, but EPB doesn't approach KMP's revenue generation, despite KMI's 42% stake in its limited partner units.

Kinder Morgan Management
KMR offers tax-friendly exposure to KMP in a way that's different from KMI. Though its dividends are essentially KMP distributions, there's no cash involved except when the shareholder opens a position, and then again when he or she sells out. Dividends are paid as shares, or a percentage of a share, so KMR is really a KMP distribution reinvestment program.

Its limited liability company structure means that it's easier to hold it in an IRA than KMP is. Investors pay capital gains taxes when they sell but don't need to worry about K-1s every year, or getting taxed on distributions when the cost basis hits zero.

Foolish takeaway
To summarize, KMP and EPB offer high yields, while requiring a little bit more attention. KMI and KMR offer more portfolio flexibility. KMI, KMP, and EPB pay cash dividends or distributions, while KMP pays in shares.

Ultimately, investors must remember that the investment vehicle is only as good as the underlying business. For a closer look, check out The Motley Fool's new premium research report on KMI. Our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out!


Read/Post Comments (6) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2012, at 11:37 PM, mr091468 wrote:

    You don't need this kind of set-up where you have a general partner sucking off cash distributions that would otherwise go to investors. Just another layer of blood sucking management. Think LINE and LNCO. No Gerneral Partner in this scenario.

  • Report this Comment On January 01, 2013, at 8:56 AM, Sumflow wrote:

    How can the KMR cost basis hit zero?

  • Report this Comment On January 01, 2013, at 9:01 AM, Sumflow wrote:

    you say:> it's easier to hold it in an IRA than KMP is. Investors pay capital gains taxes when they sell<

    If KMR is in an IRA don't they lose the benefit of paying capital gains tax on eventual disposition?

  • Report this Comment On January 03, 2013, at 10:59 PM, 123spot wrote:

    That was an excellent explanation. I am going to forward it to my longtime ML broker who could answer about none of the questions I asked him about these issues. Good job and thank you. Spot

  • Report this Comment On January 07, 2013, at 2:21 PM, dalalsid wrote:

    "To summarize, KMP and EPB offer high yields, while requiring a little bit more attention. KMI and KMR offer more portfolio flexibility. KMI, KMP, and EPB pay cash dividends or distributions, while KMP pays in shares."

    Problems with that statement:

    KMR yield > KMP yield (because they both pay the same dividend and KMR trades at a discount)

    Also typo: KMR pays in shares.

  • Report this Comment On February 05, 2013, at 1:49 PM, AlisaRB wrote:

    Ms. Duffy,

    My name is Alisa and I work for an energy magazine. I'd very much like to talk to you about the possibility of you working with our magazine as a columnist. Will you email me at aboswell@pntonline.com

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