Is Kinder Morgan Just a Fee Trick?

by: William Eichler April 06, 2008 | about stocks: KMP    

William Eichler

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Some view Kinder Morgan (KMP) as just a way to funnel fee income to the General Partners [GP] at the expense of the Limited Partners [LP].

First, lets examine the fee schedule. The GP receive 2% on the first $1.21 of distributions per unit [DPU]; 15% on the next $0.22 DPU; 25% on the next $0.44 DPU. This comes to $1.97 DPU and a fee of $0.167 or a 8.4% fee to the GP.

Beyond the $1.97, the fee becomes 50%. For a $5.00 DPU the fee becomes $1.68 or a 33.6% fee. At a $10.00 DPU the fee rises to $4.18 or 41.8% and at $20 DPU the fee is 45.9% for the GP.

But what do they do for this fee?

KMP has put together 10,000 miles of fuel pipelines and 17,000 miles of natural gas pipelines. It is a source, transporter and marketer of CO2; has 87 million tons of dry-bulk & 103 million barrels liquid, terminal capacity; and 70 million barrels oil & 9.7 billion cubic feet of natural gas storage capacity. To this, they are adding Rockies Express [REX] Pipeline; liquid natural gas terminals for the GOM, pipelines, CO2 investments or, another $4.3 billion in new projects.

For these businesses, expansions and efforts, the GP is well paid. And for passive ownership, the KMP shareholder receives a yield of 6.5% that has been raised from $0.63 in 1996 to $3.68 in 2007 for a compound annual growth rate of 17% (from KMP's March 5, 2008 Presentation, page 8). If debt scares you, note the chart "Net Debt to EBITDA" on the same page. If you hate sharing (and apparently some do) avoid KMP. Look at their March 5, 2008 presentation. This is a bread-and-butter stock.

Disclosure: Author has a long position in KMP

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This article has 4 comments:

  •  
    Apr 06 08:51 AM
    Premium management + premium assets = wealth by association.
    Works everytime. What is so difficult?
    Reply | Link to Comment
  •  
    Apr 07 11:23 AM
    save yourself the time and hassle of dealing w/ MLP K-1 income on your taxes and buy KMR, its a synthetic version of KMP (EXACT SAME COMPANY) that pays its dividend in more shares instead of cash, thus no K-1 on your taxes.
    Reply | Link to Comment
  •  
    Apr 12 03:27 PM
    Huh? So KMR doesn't just get 27% of KMP's distributions, in line with it's 27% ownership? KMR can take as much as 50% of KMP's distributions ?
    I suppose that can be done out of sight. As a distribution to general partners on the KMP income statement (sort of like a Preferred Dividend deduction on "normal" income statements.) As a limited partner, I would usually only know about KMP's declared distributions, and not that my dividend is NET after a tribute to the GP, KMR.
    Is that it?
    Reply | Link to Comment
  •  
    May 19 08:45 AM
    Hi Sellstop, no, KMR is not the GP. The GP is a private company nowadays, owned by Kinder Morgan, Goldman Sachs, etc.
    Reply | Link to Comment
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