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.
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.
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.