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Kinder Morgan Consolidation: What it Means for MLPs

NEW YORK (TheStreet) -- Kinder Morgan's (KMI - Get Report) acquisition of affiliates Kinder Morgan Energy Partners (KMP) Kinder Morgan Management  (KMR) and El Paso Pipeline Partners (EPB) may seem on its face to be a repudiation of the master limited partnership structure, but MLP investors shouldn't see it that way.

MLPs split up companies into general partners, which receive distributions, and limited partners, which pay them, while the overall structure benefits from certain tax advantages. They originated in the energy infrastructure sector, where Kinder Morgan was a pioneer, but have spread throughout the energy sector and into other industries such as real estate.

Despite their complex structure, MLPs have had a fantastic run, with the benchmark Alerian MLP Index outpacing the S&P 500 over the past one-, five- and 10-year periods.


But the fact that a pioneer such as Kinder is going back to a traditional corporate structure might be seen as a sign the game is finally up.

Not so, according to Richard Kinder, chairman and CEO of all four Kinder companies, speaking on a conference call with analysts Monday.

"In no way is this a negative verdict on MLPs," he said.

Indeed, it seems quite plausible Morgan could one day reverse course and go back to an MLP structure, according to Darren Schuringa, portfolio manager at New York-based Yorkville Capital, which specializes in energy infrastructure investments.

It all depends on how the market is valuing the company and others like it. 

Analysts had been forecasting a mid single-digit growth rate for Kinder Morgan Energy Partners prior to the consolidation. Now Kinder is forecasting a return in the low teens for the combined entity.

However, if a higher tax burden began to weigh on potential returns for the combined entity and Kinder could generate above-average yields in an MLP structure, it could go back to that structure, Schuringa contends.

He compares the question of whether or not to be an MLP to the question of whether a company should be a large conglomerate or a smaller more focused entity. Many times the market will reward one at the expense of the other until, suddenly, the game changes. 

But its not just a question of fashion. The decision about whether or not a company should be an MLP is unique to each company. That's why even as Kinder Morgan is retreating from the MLP structure, Royal Dutch Shell (RDS.A) spun off some of its pipelines into an MLP structure less than two months ago.

Weighing down the valuation of Kinder Morgan Energy Partners, a limited partner, was something called incentive distribution rights, or IDRs, paid to the general partner, Kinder Morgan Inc. As the market increasingly penalized the limited partner for those IDRs, collapsing the MLP structure became increasingly attractive.

When that changes, so could Kinder. MLPs good? MLPs bad? If only investing were that simple.

Follow @dan_freed

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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