On Feb 11, 2011 the general partner of KMP went public under the symbol KMI. The GP was taken private by a consortium of private equity firms a few years ago and now is back as a public entity. I’ve posted on KMP several times in the past (latest post here) and it is one of my favorite MLPs. Its asset foot print is very large and diversified and it has an impressive track record of meeting commitments to shareholders and delivering strong returns, 26% CAGR since going public in 1996. With the recent IPO I was interested to see if KMI is a good investment opportunity.
Recently, in a presentation (see here) given at an MLP investment conference Kinder Morgan gave some good details on the structure of KMI and how it benefits from the growth at KMP. As the general partner KMI receives incentive distribution rights from KMP which makes up 86% of the total cash it receives. It also, owns about 11% of KMP shares which represents 12% of the total cash it receives. The remaining cash received by KMI is from a 20% equity interest in NGPL, a natural gas pipelines and storage operator. Post IPO the public owns 16% of KMI shares, private equity owns 48%, and management owns 36% of the shares. Large insider ownership is something I really like to see at a company.
The important thing to understand about KMI is how it represents a leveraged play on the growth at KMP. One of the concerns I had mentioned about KMP is the large splits going to the general partner, about 50% of incremental cash flows. Thus Kinder Morgan has to grow at 10% just to provide 5% growth to its limited partners. Well, here is an opportunity to participate on the other side. With KMI, 5% growth in KMP distributions translates into 10% growth in distributions at KMI. The slide below from the recent Kinder Morgan presentation shows this well.
KMI is expected to distribute $1.16 per share in 2011. As of today’s closing price of $30 per share this is a yield of 3.9%. Thus, KMI is priced to deliver 13.9% returns from these levels. KMI has also the same tax deferred advantages of any MLP. As compared to KMP and KMR, the two LP shares classes, this return is very compelling. Based on a 2011 distribution of $4.60, KMP yields 6.4% and KMR yields 7.2%. With 5% distribution growth KMP is priced for 11.4% total returns and KMR for 12.2% total returns. The other potential benefit of an investment in KMI is a potential future buyout of the GP by KMP. GP buyouts have been a trend in the MLP space recently and if Kinder Morgan finds itself at a competitive disadvantage by continuing with the GP/LP structure it may buyout KMI in the future, most likely at a premium for KMI shareholders.
In short, KMI looks like an investment worthy of consideration. An investor gets a compelling, high growth total return in one of the largest and most stable MLPs. The investor receives a lower current yield as compared to KMP or KMR but the extra dividend growth seems to more than make up for that. If an investor wants both yield and growth, then an investment in KMR + KMI is potentially the best way to invest in Kinder Morgan.
Disclosure: long KMP
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