Kinder Morgan is a titan in the North American energy sector and a major player in Northwest fossil fuel shipments. The firm was the author of a failed scheme to export huge volumes of coal on the Columbia River in Oregon, and it is lobbying heavily to triple its oil pipeline through British Columbia in a bid to move more tar sands oil to Washington refineries and Asian markets.
It is also, as Sightline has documented, a dangerous and irresponsible company with a clear history of law breaking, deceit, and pollution.
Last week, a financial research firm, Hedgeye, released a scathing report on Kinder Morgan that supports many of Sightline’s conclusions. Aptly titled Is Kinder Morgan Maintaining its Stock Prices Instead of its Assets? (no longer available online), the report is mainly concerned with Kinder Morgan’s books, but it includes a few bombshells that should worry the public.
Consider just this sampling from the summary section:
We believe that Kinder Morgan’s high-level business strategy is to starve its pipelines and related infrastructure of routine maintenance spending in order to maximize Distributable Cash Flow…
In our view, Kinder Morgan cuts, defers, and eventually finances the [Limited Partnership’s] maintenance spending…
A broader, and more important concern is the reliability and safety of Kinder Morgan’s pipeline’s. In 2012, Kinder Morgan acquired El Paso, then the largest natural gas pipeline company in the US, in a +$30B deal; Kinder Morgan has already cut maintenance expenses by 70-99% and maintenance [capital expenditures] by ~60% on most of those assets. In our view, it is alarming that Kinder Morgan supporters believe that this is a sound business practice.
The report goes on to detail specific maintenance spending deferrals, and it enumerates a few of the mishaps—some of them deadly—that Kinder Morgan’s pipelines have suffered in recent years.
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The Hedgeye analysis made waves in the investment community. It also came in for a bit of a drubbing from company boosters (here’s some of the back and forth) and I’m certainly in no position to weigh in on the accuracy of the report’s assertions about finance. Yet we do know that the report is consistent with Kinder Morgan’s well-documented track record of law-breaking, pollution, and cover-ups.
Update 9/26/13: CEO Richard Kinder defended the firm’s practices on a conference call, and Hedgeye hit back with a rebuttal.
You can find more Sightline research on Kinder Morgan here:
And Motley Fool argues that Kinder Morgan’s practices are industry standard. Is that right? If so, does it mean that KM is OK, or that the problems are industry-wide?
The problem is industry wide because the midstream industry relies on maintaining MLP payouts to drive excitement among fund managers. For a midstream company to compete among the others, they have to cut CAPEX (predominately pipeline maintenance, repair, and replacement) to keep the cash flowing. But, that’s capitalism isn’t it? So what if a pipeline leaks or explodes here or there? Pay the fines and settlements, tack on the condition for a non-disclosure agreement, and move onto the next shale play.
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