Kinder Morgan Rewards General, Limited Partners with Income

by Dividend Growth Investor | April 19, 2013 7:18 pm

Kinder Morgan Rewards General, Limited Partners with Income

Kinder Morgan is the largest midstream company in North America, with over 73,000 miles of pipelines and 180 terminals. The pipelines transport oil, natural gas, CO2 and other products. The terminals handle a variety of products such as gasoline, jet fuel, ethanol, coal, coke, steal and others.

As I outlined in an earlier article[1], there are three ways to invest in Kinder Morgan. The first and second way to invest are through purchasing the limited partnership units. With Kinder Morgan Partners (NYSE:KMP[2]), unit holders can earn distributions in cash, while for Kinder Morgan Management LLC (NYSE:KMR[3]), limited partners directly obtain i-units, instead of cash.

Since there is no taxable event for holders of KMR, the i-units are a great tax efficient way[4] to build a position in the partnership even in a taxable account. Before the IPO of Kinder Morgan Inc (NYSE:KMI[5])  in 2011, my entire position in the partnership was in i-units. For example, if Kinder Morgan Partners paid $1.30 per unit in a given quarter, holders of Kinder Morgan Management LLC would have received a partial share worth $1.30. If the price for KMR was $100, the KMR unitholder would have received 0.013 units.

Last, there are the general partnership interests[6] in Kinder Morgan Partners, where Kinder Morgan Inc is the vehicle to purchase. Kinder Morgan Inc also owns the general partner interest in El Paso Pipeline Partners (NYSE:EPB[7]). In addition, KMI also owns limited partnership interests in Kinder Morgan Partners, El Paso Pipeline Partners and Kinder Morgan Management LLC. I recently added to my position in Kinder Morgan Inc in my IRA[8].

Over the past week, Kinder Morgan approved distribution hikes for both the general and limited partners. The limited partners of Kinder Morgan Partners also received a distributions boost to $1.30 per unit. This represented an 8% increase over the distribution paid in the corresponding quarter in 2012. This brings the current yield up to 5.70%.

The partnership is projecting an increase in annual distributions to $5.28 for 2013. Since KMP is a master limited partnership[9], distributions are not eligible for preferential qualified dividend tax treatment. Because partnerships are pass-through entities whose income is taxed at the limited partner level and not the entity level, distributions from MLPs are slightly more complex to handle from a tax perspective[10]. This is a big reason why many investors avoid them outright. Check my analysis of Kinder Morgan Partners[11].

The distributions to Kinder Morgan Management LLC will be paid in additional KMR shares. I hold the i-shares because I am in the accumulation phase and it is an option to have less complicated and time-consuming tax returns. The i-shares usually trade at a discount to the limited partnership interests, which is why it is usually a better deal for long-term holders.

Kinder Morgan Inc. shareholders will receive a higher quarterly dividend by 2.70% to 38 cents per share. This was an increase of 19% over the distribution paid in the same quarter in 2012. This brings the current yield up to 3.90%. The company is projecting an increase in annual dividends to $1.57 for 2013. Since KMI is a corporation, the dividends are eligible for preferential qualified dividend tax treatment.

The partnership is able to grow distributions from new additions to its vast portfolio of fee-generating assets. I would strongly encourage investors to read through the press release[12]. According to it, distributions are well covered in Q1, as DCF per unit was $1.46, for a DCF payout ratio of 89%. The partnership is a great vehicle for investors who are looking for high current income, with solid distributions growth. The K-1 forms make this investment slightly more challenging, although it leads to substantial tax deferral of distributions received for over a decade.

Kinder Morgan Inc is able to grow dividends faster, because of its incentive distribution rights (IDR). These IDR’s entitle the general partner to half of any incremental distributable cash flow above certain thresholds. This stock is perfect for investors who want high yields today, plus the possibility of high dividend growth. The stock is also perfect for investors who do not want to deal with the more complicated tax return that Kinder Morgan Partners would create.

Full Disclosure: Long KMI and KMR

Endnotes:
  1. an earlier article: http://www.dividendgrowthinvestor.com/2011/06/kinder-morgan-partners-one-company.html
  2. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  3. KMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMR
  4. tax efficient way: http://www.dividendgrowthinvestor.com/2009/05/mlps-for-tax-deferred-accounts.html
  5. KMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMI
  6. general partnership interests: http://www.dividendgrowthinvestor.com/2009/05/general-vs-limited-partners-in-mlps.html
  7. EPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPB
  8. in my IRA: http://www.dividendgrowthinvestor.com/2013/04/six-dividend-paying-stocks-i-purchased.html
  9. master limited partnership: http://www.dividendgrowthinvestor.com/2009/03/master-limited-partnerships-mlps-island.html
  10. more complex to handle from a tax perspective: http://investorplace.com/2012/12/mlpbdc-5-dividend-yield-hunt-requires-a-little-digging-oks-bpl-kmp-amlp-ald-apo/
  11. analysis of Kinder Morgan Partners: http://www.dividendgrowthinvestor.com/2012/10/kinder-morgan-partners-kmp-for-high.html
  12. the press release: http://phx.corporate-ir.net/phoenix.zhtml?c=119776&p=irol-newsArticle&ID=1807861&highlight=

Source URL: http://investorplace.com/2013/04/kinder-morgan-rewards-both-general-and-limited-partners-with-income-kmi-kmr-epb-kmp/
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