McDep Stock Idea by email

SEC Investigation of Kinder Morgan May Be Catalyst for Revaluation

 

After the market close on May 5, sell recommended Kinder Morgan (KMI, KMP, KMR) announced that the Securities and Exchange Commission was investigating the "high greed" partnership's accounting.  That could be the catalyst for the revaluation of Kinder Morgan that seems likely eventually by our analysis.  High McDep Ratio, high ratio of debt stocks like Kinder Morgan have low tolerance for doubt.  There is little upside left after heavy promotion and the downside is limited only by a stock price of zero.

 

The investigation of Kinder Morgan gives new promise that the SEC may be recognizing a fertile target for limited regulatory resources.  Until now the SEC seems to have looked the other way with regards to partnerships that have the "high greed" compensation formula.  About a month ago the commission apparently gave the partnerships a pass on the independent audit committee requirement of Sarbanes-Oxley reform.  That looks to us like the SEC is blessing Ponzi income schemes and Insull debt pyramids covered up with Enron accounting.  If there is any portion of the energy industry after the failed power sector that needs SEC attention and the application of the principles of new legislation, it is the offending partnerships in our opinion. 

 

Picking up on the independent audit committee, we see a need for more realistic accounting for the general partner's compensation.  Just as convertible securities are accounted as dilutive when stock price is above conversion price, the GP compensation should be accounted as dilutive when the GP takes an increasing share of value.   A large equity interest for a GP that takes a large share implies writedowns of value for the limited partners.  A truly independent audit would impose such a charge.  If the SEC presses in that direction, we ought to see billion dollar earnings restatements.

 

What we see in the accounting for the Tejas acquisition, the transaction in question, is that the limited partners are charged for the full cost of the acquisition and only receive about half the benefits.  The GP is charged nothing and gets the other half of benefits.  The balance sheet is out of whack with the cash flow and income statements. 

 

Questions about accounting are often the first public indications that fraud is about to be uncovered.  We hope the SEC will at least require the presentation of more realistic financial statements for continued access to the public markets by high greed partnerships.

 

Kurt H. Wulff, CFA

 

Analyses are prepared from original sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. Historical independent energy investment analysis by Kurt Wulff doing business as McDep Associates is posted at www.mcdep.com.  Mr. Wulff is not paid by covered companies.  Neither Mr. Wulff nor his spouse hold a long or short position in the securities of Kinder Morgan.