weiwentg (97.00)

Kinder Morgan LP vs Kinder Morgan Management LLC

June 21, 2009 – Comments (2) | RELATED TICKERS: KMR , KMP

Kinder Morgan is the grandfather of all energy Master Limited Partnerships. They run pipelines that carry natural gas. Due to regulatory constraints, once you have a pipeline in a region, competition is unlikely. Although Kinder Morgan isn't going to grow very rapidly from here on, it pays a hefty distribution. It also is one of the only MLPs with the scale and financial resources available to take advantage of mega-projects like the Rockies Express. Domestic natural gas reserves are large and growing, and natural gas is a relatively low-carbon fuel. Natural gas requires pipelines to transport it to regions where it is used - pipelines like Kinder Morgan owns. This is easily an investment that could be held for decades.

The price is right today. The main downside is that KMP is the limited partnership of the Kinder Morgan empire. The general partner is entitled to 50% of the incremental distributions, meaning that KMP will not be able to grow its distributions extremely fast. You used to be able to be able to buy the general partner (KMI) on the market, but it got bought out - smart move by those folks. Additionally, KMP's sheer size also means that its hyper-growth days are over. That said, KMP's business is fee-based by volume of natural gas or whatever liquids transported, and the fees usually have inflation riders built in. I expect KMP to grow its distributions by at least 4% annually, faster than I expect long-run inflation rates to be. Yes, hyperinflation is possible, but just about every investment aside from gold and commodities will suffer in that case. 

KMP is a MLP, and requires you to fill out a K-1 form every tax season. That's a little annoying. However, given the size and stability of Kinder Morgan's distributions, investors interested in current income will probably find it worth it. KMP and other MLPs may cause trouble if held in an IRA; they produce unrelated business income and if that amount is over $1,000, it may subject your whole IRA to tax and the need to file in every state that KMP does business (i.e. a lot of states). However, I hear that generally isn't a problem unless you have gigantic amounts of stock. MLPs themselves are tax deferred, so it's OK to hold them in a taxable account.

Another option is Kinder Morgan Management. This is organized as an S-Corporation and it pays dividends in stock. Holding this in a taxable account may cause tax headaches related to tracking your stock dividends. However, its' perfectly suitable for an IRA. Additionally, for whatever reason, KMR is trading at a 12% discount to KMP (which itself is trading at a discount to its fair value).  That's a significant discount. One share of KMR represents the same share of Kinder Morgan as a share of KMP. Of course, you don't get cash distributions, which makes KMR somewhat less valuable, but not 12% less. Given that I'm in the asset accumulation phase of my life, I plan on buying KMR in my IRA.