March 11, 2002; Repeal the Partnership Tax!

Investors hear me out

The General Partners have levied a burdensome tax on the population in the form of an incentive compensation increase

This could happen to you

Well, let me tell you the story of a man named Charlie on that tragic and fateful day

He put a share in his pocket

Kissed his wife and family and set out to ride on the MTA

When he got to the Scollay Square station the conductor said

One more nickel for the GP!

And Charlie couldn't get off of that train

Well did he ever return?

No, he never returned

And his fate is still unlearned

Poor old Charlie

He may ride forever 'neath the streets of Boston

He's the man who never returned.

Source: The Kingston Trio, with modification

Just as energy trends look more positive, Wall Street is preparing to market new issues of energy infrastructure partnerships.  Overleveraged parent companies including Kinder Morgan (KMI), El Paso (EP), Williams (WMB) and Dynegy (DYN) each have transferred or acquired pipeline properties for limited partnerships in anticipation of selling new units. 

 We see many problems.  First, the sellers are in financial distress. Belatedly recognizing that unregulated businesses require more equity capital than regulated business, the credit rating agencies are downgrading companies with too much debt.  Considering those circumstances, one would expect a steep discount for buyers who can afford to be choosy.  Instead, McDep Ratios for two of the partnerships, KMP and EPN, are among the highest of any energy stocks we cover.

Second, the supply is large.  Considering how many new units are contemplated, perhaps there should be a volume discount as well.  Existing units, particularly those highest on the Greed Gauge, may decline in price in anticipation of the new supply.

Third, the accounting is inadequate.  The dilution caused by general partner compensation is only partly disclosed in issuer financial statements and is further disguised in Wall Street research.

Fourth, general partner compensation is too high to be sustained in a competitive environment, in our opinion.  Marketed as tax preferred investments, the partnerships are subject to general partner tax more onerous than the government tax foregone.  We recommend that investors be vocal in encouraging the sellers of partnership units to repeal the general partner tax.