Last week an investor in Kinder Morgan Partners (KMP) filed a lawsuit against its general partner, Kinder Morgan Inc. (KMI), alleging that KMI (which runs KMP) had directed excessive cash distributions to itself to the detriment of investors in KMP. The suit (filed by Jon Slotoroff) highlights a seldom noted feature of MLPs, which is that investors have far less power than conventional equity investors in a corporation. MLP GPs are extremely hard to displace, enjoy preferential rights with respect to distributable cashflow (DCF) and can organize the capital structure of their MLP in such a way as to benefit the GP at the expense of the MLP unit holders (by, for example, causing the MLP to issue dilutive equity that increases distributions to the GP).
These features are disclosed to those who read the documents. KMP’s 2013 10-K for example notes in its Risk Factors that, “The general partner can protect itself against dilution”, that conflicts of interest of the GP may be resolved in ways that are unfavorable to LP unitholders and various other issues of control. Removing KMI as the GP takes a two thirds vote of the LPs but no one holder may vote more than 20% of the units even if they own more.
Simply put, the value proposition for an MLP is for its GP to manage its distribution yield and capital structure such that it’s just sufficient to maintain demand for new units as they’re sold but not overly generous. Too much abuse of LPs will drive up the required yield to sell additional equity, impeding the GPs ability to continue growing the MLP and the DCF it receives. But there’s little point in running an MLP to be overly generous to its unitholders, unless the GP also owns healthy percentage of the MLP’s units (and some do).
Suing KMI under such circumstances seems to be a waste of time, although America is a litigious country and any lawyer will tell you that in court anything can happen. But the fact of the lawsuit highlights the stronger position of GPs versus LPs in the MLP structure. The sensible move would seem to be to invest in GPs and therefore avoid the need to sue as a disgruntled LP. Evidently, not everybody reads the SEC filings before they invest.