Kinder Morgan Management: As Solid as It Gets

by Jon Markman | January 22, 2012 8:00 am

Dozens of companies own energy pipelines in the U.S., but only one is a pioneer, a model for all its peers and one of the most reliable moneymakers for investors that ever traded on the Big Board.

I’m talking about Kinder Morgan Management (NYSE:KMR[1]), one of the top picks of my model this month — and for many previous months, to be honest. It’s one of the largest energy pipeline and storage companies in the country, with over 37,000 miles of pipelines and 180 terminals. Its extensive pipeline network transports natural gas, crude oil and other refined petroleum products.

Kinder Morgan is also able to store and handle an array of products at the terminals, including gasoline, jet fuel, ethanol and coal.

The ownership structure of Kinder Morgan is unique, as Kinder Morgan Energy Partners (NYSE:KMP[2]) actually owns most of the assets like the pipelines. KMP is set up as a master limited partnership[3] and is one of the largest in America.

The general partner of the partnership is owned by Kinder Morgan Inc. (NYSE:KMI[4]), while the third entity, and the one we own, Kinder Morgan Management manages and controls these business units, as well as several other related subsidiaries.


KMR owns roughly 30% of KMP, and its shares trade pari passu, or in step, with units of KMP. Thus, the dividend we receive is equal to the cash distribution that the asset holder KMP, pays out. The primary difference is that KMR shareholders are paid out in shares, similar to a dividend reinvestment program.

As a result, KMR doesn’t own any properties, and its success depends on its operation and management of KMP. The combined Kinder Morgan entity has more than 8,000 employees and an enterprise value of nearly $60 billion.

KMR has been a pillar of consistency since going public in 2001, logging a compound annual growth rate of 15%. Additionally, the primary asset holder, KMP, has achieved its budgeted cash distribution target 10 out of the last 11 years, including raising  distributions 7% annually for the last five years.

In October last year, Kinder Morgan agreed to purchase El Paso Corp. (NYSE:EP[6]) for $38 billion. This will push Kinder Morgan to over 80,000 miles of pipeline and create both the largest midstream energy company and the largest natural gas pipeline company in North America.

The management team has proven itself adept at integrating significant transactions of this nature, having acquired Santa Fe Pacific Partners, KN Energy and Terasen Gas all in the last 20 years. Acquisitions have totaled $11.5 billion, and another $13 billion in expansion projects.

The El Paso deal should be immediately accretive to cash flows, and although still subject to shareholder and regulatory approval, is expected to close in the second quarter of 2012.

Kinder Morgan is one of the most transparent S&P 500 companies you’ll ever encounter. It’s one of the few publicly traded firms that publishes is annual budget on its website.

It doesn’t have a Political Action Committee, and it doesn’t make any political contributions, which is also rare for a company with its size and breadth. Additionally, it doesn’t have unnecessary overhead expenses like corporate aircraft, sponsorships, sports tickets or other executive perks.

This philosophy is taken directly from Chairman and Chief Executive Richard Kinder, who takes a salary of $1 per year and receives no bonuses or stock options. As simply a shareholder, Kinder has directly aligned his interests with those of the company. Impressive.

The former president of Enron well before that company turned south, Kinder left in 1996 to start his own pipeline company with an old college friend, William Morgan. He is director of the National Petroleum Council and sits on the board of several firms.

According to an analyst with Morningstar who follows the company, “Rich Kinder is the rarest kind of visionary. Not only did he see the potential for a hard assets business while at Enron, but he has a focus on execution that has enabled him to build one of the largest pipeline companies in the country, bit by bit.”

You would be hard pressed to find another company as transparent and fiscally responsible as Kinder Morgan, while at the same time achieving aggressive growth and operational excellence. This is another keeper on our list.

  1. KMR:
  2. KMP:
  3. master limited partnership:
  4. KMI:
  5. [Image]:
  6. EP:

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