May 13, 2002; Greed Gauge Taints Sponsors

News about accounting questions at Dynegy that accompany another precipitous drop in stock price prompt us to reexamine the Greed Gauge connection.  Apparently Dynegy Energy Partners, L.P. is still in registration awaiting clearance before offering its securities to the public. Arthur Andersen and Vinson & Elkins, Enron’s former accountants and lawyers, are listed on the application.  The new entity would attempt to attract investors with an artificially high distribution and, if past examples were any indication, would soon pay high compensation to the general partner. 

Dynegy would transfer properties it now owns to the partnership and retain ownership of the general partner interest.  Investors would contribute full value for properties priced by Dynegy.  Ultimately as much as half the value of properties would be repaid to the general partner in return for no capital contribution.  Typically, general partner compensation is only partly disclosed in accounting statements.  The partnerships are highly promoted to individual investors and are generally lauded in the business press.  The lucrative, we would say egregious, general partner compensation is attracting many parties to form similar entities. 

Aside from obvious ethical questions that arise, the partnerships are likely to fail to meet expectations ultimately as a result of sheer economics.  So many are being formed that the long-term return from properties in which the partnerships invest is highly likely to be average.  As a result, few, if any, will be able to earn enough to pay investors a normal return and to pay the general partner compensation, or tax, as we put it.  The problem is that it takes a few years for failure to be obvious.  Then the general partner is under no obligation to repay excessive compensation already received. 

Thus in our mind, operating or intending to form one of these partnerships is a red flag.    We have an outright negative rating on Kinder Morgan and El Paso Energy Partners, the stocks highest on the Greed Gauge.