KMI's IPO provides investors with a way to invest in KMP's general partner.
With the IPO of Kinder Morgan Inc., investors can now choose between three stocks that derive their value from the same set of cash flows. Kinder Morgan Energy Partners
Before we get into the structure of each of these stocks, it's important to understand the core assets that generate cash flows underlying all three investment opportunities. At its heart, Kinder Morgan is a pipeline company. The original partnership was created in 1997 by Rich Kinder and William Morgan, when the two got together to purchase a pipeline from Enron. Back then, Enron was busy inventing fabulous--and later fraudulent--business models that focused on "asset-lite" strategies. Enron just didn't see the value in old-fashioned hard assets. Kinder did.
Through a series of acquisitions, Kinder Morgan Energy Partners quickly became one of the major pipeline operators in the country. Today it operates refined products, natural gas, and carbon dioxide pipelines; liquids and bulk storage terminals; rail and truck facilities; and produces crude oil in three West Texas fields. It spearheaded the Rockies Express pipeline, one of the largest natural gas pipelines built in the United States, and has built out a strong position in gas gathering and transportation in most of the major shale plays in the country. In 13 years, Kinder Morgan has increased its enterprise value by more than 900% and has managed to grow distributions to limited partners at a compound average annual rate of 12.6%.
In our view, three factors helped facilitate such rapid growth. First, Kinder recognized the inherent value of wide-moat pipelines and terminals and acquired several at very attractive prices. By focusing on franchise assets with high utilization, attractive regulated rates of return, and opportunities to expand, Kinder built a strong platform for stable and growing cash flows. Second, the MLP structure made financing attractive projects and acquisitions cheaper for Kinder Morgan than c-corp competitors could afford. The fact that Kinder did not pay entity-level taxes meant it could pay more for an asset and still realize higher returns. Third, in this industry size begets size. Cash flows increased as Kinder Morgan built or acquired additional assets, which enabled increasing distribution payments. In turn, the combination of above-average yields and well-above-average distribution growth helped to guarantee an active market for new equity issues, making it easier to finance new growth.
While we think the days of 12% annual distribution growth are a thing of the past for Kinder Morgan, largely due to its size, we continue to think the partnership will be able to increase its limited partner distributions at a healthy 4%-5% a year. This growth, combined with a yield around 6%, adds up to very attractive total return prospects, particularly in this market.
Kinder Morgan has a long history of multiple investment options. The partnership created KMR in 2001 as a way to provide access to KMP's growth without the hassles of owning MLPs. And of course, despite the term "initial public offering," KMI is nothing new. KMI first went public in 1999, when Kinder acquired a gas distribution company in Kansas. In 2007, Rich Kinder and a group of private equity backers took the company private. Now, four years later, it is returning to the public market.
The key differences between the three stocks are captured in Table 1. Kinder Morgan Energy Partners, or KMP, is a master limited partnership. As a partnership, it pays no entity-level taxes, instead passing taxable income and depreciation through to partners on a pro rata basis. Stockholders own units representing limited partnership interest rather than shares of a company. Common units pay cash distributions quarterly, and the partnership sends out K-1 forms instead of 1099s. Until 2004, mutual funds could not own partnership units, and many mutual funds do not to this day.