April 8, 2002; Kinder Morgan and El Paso Partners In Debt Pyramids

During the 1920s when the stock market boomed in similar fashion as in the 1990s, pyramid ownership forms apparently became popular in the energy infrastructure industry.  A company at the top of the pyramid owned a portion of the shares in companies at the second level.  A company at the second level in turn owned a portion of the shares of companies in the third level.  The company at the top exerted control over all the companies lower in the pyramid. 

Magnified control also meant magnified leverage through borrowing at each level of the pyramid.  When business slowed, the pyramids collapsed under the burden of excessive debt.  Investors lost great sums.

The bust brought recrimination and a host of new regulations including the Public Utility Holding Company Act.  Pyramids were severely curtailed in the energy infrastructure industry.

The pyramid is back in energy infrastructure.  KMI sits atop a pyramid with KMP and KMR and other KMI investments at the second level and about a billion dollars of KMP investments in pipelines at the third level.  Our ratio of debt for KMI of 0.78 includes KMP debt from the second level of the pyramid, but none of the debt from the third level or from other second level KMI investments.  Only AES, among Mid Cap and larger companies in our coverage, has a ratio of debt higher than KMI. 

Pyramids are not inherently bad and debt is a vital tool to promote economic growth.  Using a pyramid structure to disguise too much debt can be deceptive.  Too much debt is a condition investors can readily avoid if they recognize it.