Imagine a company whose CEO was the former president of Enron and a college buddy of former Enron founder/CEO and convicted fraudster Ken Lay. Now imagine that the same company has an incredibly complicated corporate structure that consists of three different (though interrelated) publicly traded classes of stock-like securities.
And on top of that, what would you think if the very same company got its start by buying assets off Enron's books? As if that weren't enough, what would you think if a long-term industry analyst consistently panned the company, citing things like "misleading accounting"?
Would a company like that pass your initial sniff test?
Truth is as strange as fiction
You can actually find a corporate group with the somewhat dubious honor of matching all those criteria. Far from how it may seem on the surface, it's actually a successful player in its industry. What is it? It's the Kinder Morgan group of companies, one of the largest energy pipeline businesses around.
Richard Kinder, who acts as CEO of most of the companies in the Kinder Morgan group, was Enron's president and a college friend of Ken Lay, but their paths diverged about the time Kinder was passed over for the top spot at Enron in 1996. Kinder was more interested in the old-school, asset-heavy natural-monopoly of the pipeline business than the newfangled energy-trading empire Lay was supposedly building at Enron. As history showed, Kinder certainly got the better end of the deal.
And as for Kurt Wulff, the analyst with the concern on Kinder Morgan's accounting? Well, part of it seems more like a long-standing personal feud, while the rest seems to be about the way cash is shuttled around the various entities within the complicated company.
About that complexity ...
The group's primary business, Kinder Morgan Energy Partners (NYSE: KMP), is structured as a limited partnership. That gives it tax advantages, as the partnership passes on much of its tax costs to its partners. The structure also allows its general partner to exert complete control over the business, since limited partners provide financing but have no say in the company's ongoing operations.
That partnership structure drives much of the complexity, although the Kinder Morgan group adds an additional twist to the standard partnership setup. It's hard to keep all the moving parts straight without a scorecard, so here's one you can keep for future reference:
| Specific Entity | Shares Represent |
|---|---|
| Kinder Morgan Energy Partners | Direct ownership of limited partnership interests |
| Kinder Morgan (NYSE: KMI) | Indirect ownership of general partnership interests |
| Kinder Morgan Management (NYSE: KMR) | Indirect ownership of limited partnership interests; alternative to Kinder Morgan Energy Partners shares |
Shares of Kinder Morgan or Kinder Morgan Energy Partners give you exposure to part of the general partnership interests or limited partnership interests, respectively. That leaves Kinder Morgan Management. Owning Kinder Morgan Management shares is similar to owning the standard Kinder Morgan Energy Partners limited partnership units; the management company's dividends are based on the limited partnership's distribution rate, although the management company pays its dividends in additional shares rather than cash.
There are two key reasons that Kinder Morgan Management exists, despite the complexity it creates; one that favors investors and the other that favors the company.
Investor: Since Kinder Morgan Energy Partners is a partnership, it can generate something called "Unrelated Business Taxable Income" (UBTI). That makes it tough for investors to own the limited partner in their IRAs, because it means their otherwise tax-advantaged IRA may not only owe taxes on the UBTI but may also have their entire tax-favored status put at risk. Kinder Morgan Management has been set up specifically to avoid generating UBTI. That setup makes it easier for IRAs to own.
Company: From the company's perspective, the Kinder Morgan Management setup enables the business to hold onto and reinvest some of the cash that would otherwise be paid out as distributions to the limited partners.
As is true of most public energy partnerships, the general partner gets the better end of the distribution growth these days as the company has matured. Still, the limited partners have little to complain about. With their current yield around 6.2% and a per-unit distribution that has been regularly increased for more than a decade, the limited partners have been and continue to be comfortably compensated for their investment.
So what's wrong?
Complex or not, Kinder Morgan Energy Partners' distribution growth has been slowing down lately. A big part of that is driven by the fact that its giant Rockies Express pipeline isn't performing all that well, thanks in large part to fracking enabling shale gas to be produced so cheaply. That cheap, more locally produced natural gas means that long-haul pipelines like Rockies Express aren't needed to move as much gas as originally envisioned.
As a result, Kinder Morgan and its partners on the pipeline, Sempra Energy (NYSE: SRE) and ConocoPhillips (NYSE: COP), aren't seeing the returns they had hoped for. It has been so weak that ConocoPhillips has been trying to unload its stake in the pipeline, but recently had to defer that sale due to lack of interest.
So while Kinder Morgan is certainly not a scam, some of the bloom has fallen off this particular Texas rose. I still consider Kinder Morgan Energy Partners to be a core stock worth owning, but I'm not expecting the growth of years past to return.
