“This CEO takes just a $1.00 annual salary and flies coach… So His Shareholders Can Live the Millionaire Lifestyle”

Teaser for Roger Conrad's MLP Profits says this "dream" pick just got better

By Travis Johnson, Stock Gumshoe, November 9, 2011

That’s what we all want to see, right? A skinflint CEO who skimps on perks and saves money for shareholders, and who pays out cash to those shareholders (well, that’s what we want to see if we don’t work for him, at least).

And that’s what Roger Conrad is teasing today for his MLP Profits newsletter, a project he co-edits with Elliott Gue that’s focused on, you guessed it, MLPs. Those are Master Limited Partnerships, in case you’re not in the know on that, pass-through entities that usually own energy infrastructure assets and pass their free cash flow straight through to investors in the form of dividend-like distributions.

MLPs are loved by many investors both for these high dividends and their utility-like stability in most market conditions, and for the tax deferral that they provide — we’ve talked about them many times in the past, including a long discussion of the MLP-teasing “10-86 Payback Plans” a month or so ago, but this time we’re getting an exciting tease for one specific company in the sector… so let’s sniff out those clues and identify Conrad’s pick for the legions of Gumshoe Readers, shall we?

That is, unless you’d rather sign up for the newsletter for $497 and get the word straight from the horse’s mouth.

No? OK, moving on …

The intro to the ad focuses on the penny-pinching ways of our CEO:

“He’s management’s worst nightmare… and a shareholder’s dream come true.

“His net worth is over $7 billion, though you’d never know it by looking at him.

“He doesn’t have his own jet… and when he flies, it’s in coach. When he travels, he stays at Red Roof Inns.

“His annual salary? A whopping one dollar.

“Yes, you read that correctly. And it’s just one reason why he’s been able to make so many investors so wealthy.

“In this volatile age of bailouts, bankruptcies and shredded portfolios, he operates one of the safest, surest and most lucrative enterprises in America—without paying a cent in income tax.

“And it’s made many investors up to 2,500% richer.

“In fact, on November 14, you’ll have a chance to share in these riches when he gives away $382,000,000.”

As we noted, he ain’t “giving away” $382 million — these are pass-through entities and they’re designed to funnel free cash to shareholders, so the company is just fulfilling its mandate. It happens to be a big company, so it’s a big number, but we’ll get to the “per share” numbers in a minute to give some perspective.

We get the full story of this CEO’s background, too — something the folks at Investing Daily love to do, pitching us on the CEO’s life to point at the hardships he’s been through and the brass-knuckles choices he’s made … in his case, his initial forays into business were crushed by the Florida real estate crash of the late 1970s, which drove him into bankruptcy … and into the loving embrace of a company that would soon get sucked up into Enron. He was college friends with Ken Lay, and was on track to be Enron CEO, but apparently spoke out against their energy-trading and accounting shenanigans and wanted them to focus on the hard assets … when that didn’t work, he went his own way, bought those hard assets from Enron, and created the company that Conrad is teasing today, a massive pipeline owner.

Here’s how Conrad puts it:

“Shortly after leaving Enron, he would use his skills and commitment to the 3 Rs [real assets, real earnings, real cash] to build himself and others a fortune—right under Enron’s nose.

“You see, as Enron became more enamored of trading rather than distributing energy, it was eager to unload many of its assets.

“One of them was a small natural gas pipeline.

“He knew that such an asset is where the real money lay. So after leaving Enron, he offered to take it off their hands for a mere $40 million—which he was prescient enough to recognize as a total steal.

“The fat cats were too busy lining their own pockets—with total disregard for the interests of their shareholders—to know or care.

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“But due to his experience in the energy industry, our man knew.

“And from this $40 million quickly grew one of the biggest fortunes in America—a $24 billion “recession-proof” enterprise that doesn’t pay a cent in income taxes and gives away its profits directly to investors.

“And it’s all perfectly legal.

“He does it by using a special structure—codified by the U.S. Congress—that not 1 investor in 100 even knows about.”

So that’s probably enough for many of you to come up with at least a solid guess about which company this is … but we get one more little tidbit as well.

The latest iteration of this ad, which I’ve seen off and on for a couple weeks, adds this to our consideration:

“I want to alert you to the news that the company’s general partner recently agreed to purchase 43,000 more miles of gas pipeline, natural gas storage facilities and oil- and gas-producing fields—all of which have little overlap with its existing portfolio.

“This purchase is expected to fuel distribution growth even beyond the impressive record you’ll read about below. We were strongly recommending this company before this news—but the dream just got better. Please read on…”

So who are they teasing us with over at MLP Profits?

This is the big daddy of pipeline MLPs, Kinder Morgan Energy Partners (KMP — free trend analysis from Marketclub, one of our advertising partners).

FYI, Kinder Morgan also has a corporate version of this MLP, Kinder Morgan Management (KMR), which bypasses MLP tax forms and issues distributions in the form of shares instead of cash. KMR trades at a much larger discount to KMP than it did five years ago, I’m not sure why — might be worth looking into if you’re interested in the name.

And yes, Richard Kinder, the CEO we’re teased about, is a very well-known energy name, a former College buddy of Ken Lay and a higher-up early on at Enron before that company went really goofy. And he is a famous corporate skinflint, there are plenty of stories floating around about him, but my favorite quote is this from a recent MoneyWeek profile:

“Forget seeing the company’s name on a stadium – Kinder won’t even pay for a box inside of one.”

The latest big transaction is the deal by their general partner, Kinder Morgan, Inc. (KMI) to buy El Paso, which is what provided the “even more of a dream” add-on tease here — this will bring more assets into the parent that they can pass down into the MLP and make them by far the biggest pipeline company in the country, though they were certainly huge before, and it will provide the next wave of growth in the MLPs — both Kinder’s MLP and El Paso’s MLP, which will continue to exist as a separate entity (El Paso Pipeline Partners, ticker EPB).

KMP currently yields about 6% — a $75 share price and a quarterly distribution of $1.16 (they’ve increased the distribution by one penny each quarter this year, and generally have increased it over time, though it can also sometimes go down). KMI, the general partner, currently yields a bit over 4% — they were taken private in a leveraged buyout back in 2007 and just IPO’d again back in February, the price is down a bit from the IPO and the buyout shops still hold a substantial portion of the shares. KMR, the one which pays distributions in the form of additional shares, is a little tougher to figure out but it looks like the effective yield is somewhere in the 7% range.

You can see the full Kinder Morgan conference call transcript here in case you’d like more of a discussion of their recent results and some chatter about the acquisitions.

I’m actually intrigued by the general partner in this case (KMI) — they’re clearly taking a bit of a gamble levering up to buy such a large company, but being a general partner is a very profitable business … their primary asset is ownership in shares of the limited partnerships, but they usually have incentive distributions that let their income rise more quickly than the MLP distributions, and I like the idea of one company serving as general partner to two large and growing MLPs (part of acquiring El Paso means they get to be the general partner for El Paso’s MLP). But I’ve just started to look at KMI and it’s a very fluid situation, with the large transaction probably not closing for several months and with KMI probably needing to offload El Paso’s production assets to help cope with their larger debt burden.

And as I probably say almost every time I write about these firms, it’s hard to argue against going with a portfolio of a few of the large MLPs if you like the sector, the distribution income, and the general stability they tend to offer — they typically have inflation protection insofar as they’re able to raise rates, and they are not dependent on commodity prices since they operate as toll businesses that are paid by volume, not as a percentage of the gas or oil they transport. There’s also generally a big advantage in having a diversified portfolio of pipelines to make sure you’re not tied just to one production area or one consumption region or one commodity (or one pipe, as we’ve seen with some pipeline-specific spills and controversies over the years).

But MLPs do also trade in line with income investments to a substantial degree (or they have historically done so, at least), so if rates ever do rise on long-term bonds that will be potential competitive pressure for income investments like MLPs and REITs, all else being equal. I don’t currently have any pipeline investments to speak of, but I’d probably still look to the big guys first if this were my intent — and there are also some ETFs, including AMLP, that give you some of the benefit of MLP distributions without single-company risk (and without tax benefits — there’s apparently more of a tax drag on these ETFs than I would have guessed, as per this Motley Fool article).

So there you have it — a teaser for what is probably the largest and best-known of the pipeline MLPs. Think this is the kind of income investment you’d like to have in your portfolio, or do you have others you’d suggest to your fellow Gumshoe readers? Let us know with a comment below.

And if you’ve tried out MLP Profits, we’d love to know what you thought — just click here to submit a short review of the newsletter for your fellow investors.


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