Kinder Morgan Inc (KMI)’s Payout Coverage Will Still Be Thin After Reorganization for Conservative Income Investors: Josh Peters

Ever since Kinder Morgan Inc (NYSE:KMI) has announced its reorganization of buying three of its associated companies. The Street has been divided upon whether this is good for the shareholders of the respective companies or not.  Kinder Morgan Inc (NYSE:KMI)’s shareholders had a good ride while the company continued to give them a good payout, but will the going be as good after the reorganization? Josh Peters, editor of Morningstar DividendInvestor, answered that question recently in a video on Yahoo! Finance.

“Well, part of the way Kinder structured its organization in the past is, you have a general partner Kinder Morgan Inc (NYSE:KMI) at the top of the heap, it in turn is collecting incentive distributions from several subsidiary partnerships Kinder Morgan Energy Partners LP (NYSE:KMP) and El Paso Pipeline Partners, L.P. (NYSE:EPB). And, effectively, with each new unit that these two partnership issues in order to fund their growth, that distribution is being paid to the new unit holder and an additional distribution almost as large is being upstream back to Kinder Morgan Inc (NYSE:KMI) […],” Peters said.

Kinder Morgan Inc (NYSE:KMI) has been one of the pioneers of the Master Limited Partnership (MLP) financial structure, it helped popularize this structure way back in the 90’s. A host of companies related to the oil and gas business saw the benefit of the MLP structure over the years and adopted it. The MLP structure basically allows companies to pass on their profits directly to the shareholders without paying corporate taxes on them.

Peters feels that although this arrangement was very lucrative for the general partners in the company, it proved very cumbersome for many of the subsidiary companies to grow under this arrangement. He believes that the biggest benefit of this reorganization would be that the additional profit distribution can be curtailed and the cost of capital for the companies to grow would be significantly reduced. According to Peters, who will end up being the loser in the transaction is a ‘matter of opinion’, but his calculations show that the income Kinder Morgan Energy Partners LP (NYSE:KMP) and El Paso Pipeline Partners, L.P. (NYSE:EPB) used to receive would drop following this reorganization.

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