Kinder Morgan Energy Partners (NYSE: KMP) has a growth problem.

And by that I don’t mean that one of the largest MLPs and leading pipeline operators lacks for ideas about how to deploy its historically cheap capital. And it’s not as if there aren’t many genuine opportunities in the suddenly booming domestic energy sector. There are, and Kinder Morgan continues to exploit them.

No, Kinder Morgan’s growth problem is that it has grown a whole lot, for going on 19th year now. And for all but one of those years it’s had to share all of its profits above a certain threshold 50/50 with its general partner, Kinder Morgan (NYSE: KMI), in a devil’s bargain known as incentive distribution rights.

From KMI’s annual report:

This wasn’t a problem in the early years when distributions below the threshold still accounted for the bulk of the cash flow. But these aren’t the early years anymore, and last year KMP paid KMI a general partner’s interest (consisting mostly of incentive distribution rights) equal to 43 percent of its distributable cash flow. The year before the figure was 45 percent, this year’s drop explained by forbearance on the part of KMI of some of the incentive distribution rights created by KMP’s acquisition of Copano Energy.

Source: Kinder Morgan presentation

The GP and the green in the chart above stand for the general partner’s take; the blue for what was paid to limited partners. What this means in practice is that KMI collects half the total return from all new (and most old) capital projects, projects that were financed entirely by KMP via debt and by its unitholders through the partnership’s frequent sales of equity.

Those equity sales and the associated increases in the unit count have, in turn, capped growth in per-unit distributions at well below the growth in total distributable cash flow.  Kinder Morgan is justifiably proud of the 13 percent compounded annual growth rate it has achieved in per-unit payouts since 1996.

Source: Kinder Morgan presentation

What’s not immediately apparent from the chart above is that the compounded annual growth rate is down to 5.6 percent since 2008. This year’s forecast is down to 4.7 percent, a significant letdown from the 7 percent achieved in 2013 and the 8 percent increase the prior year.

Why? Well, distributable cash flow is forecast to increase 13.9 percent this year, but because the average unit count is expected to go up 9.4 percent, total distributable cash flow per unit is set to rise just 4.1 percent. Only by whittling its already tiny excess coverage ever closer to zero does Kinder Morgan get to the promised 4.7 percent payout hike, which can then be rounded up to 5 percent to match its newly reduced long-term forecast.

There are no mysteries here: per-unit distribution growth is down because issuance is up, a lot.  And issuance is up to finance heroic investments in growth.

Source: Kinder Morgan presentation

To pay for this spending spree, KMP issued $6 billion in equity last year, including $3.7 billion to make the Copano acquisition. It also added $2.3 billion in net debt. And then it turned around and paid out $2.2 billion to the limited partners.

Imagine if KMP were an independent company that made $2.2 billion but planned to spend $4.6 billion on expansions and acquisitions the next year, as KMP plans to do in 2014, before any takeovers yet to be announced. That doesn’t sound like a very conservative business plan no matter how great the opportunities the partnership’s pursuing.

An optimist might call the spending justified based on the fact that KMP’s cost of capital, even with the onerous incentive distribution rights, is still “only” about 8 percent, well below the partnership’s long-term return on investment average of about 13 percent.

A realist has to wonder what would happen to the cost of capital if the ultra-low interest rates currently anchoring it were to go up, or if a market verdict that the incentive scheme is unsustainable (or any other unexpected issue) were to drive up the cost of KMP’s equity capital.

Perhaps this is why KMI’s multi-year dividend growth forecast has come down too, from 9 to 10 percent  a year as of last year to 8 percent  year over the next three years as outlined at last month’s analyst meeting. Almost certainly it’s why management felt compelled to insert into its presentation the promise that “If we get to a point where we cannot deliver attractive returns to LP investors, we would consider other options.”

It’s an odd warranty to have to make on behalf of an energy company that claims it’s thriving. But then again empire-building doesn’t always work out exactly as hoped. KMI, for example, is already paying the price for two costly rate rulings that have gone against another affiliate, El Paso Pipelines (NYSE: EPB). That partnership, acquired by KMI at a 37 percent premium in 2012, had forecast distribution growth of 12.5 percent a year through 2015. Instead, it’s now had to suspend increases until 2017 at the earliest.

What does Kinder Morgan’s pledge to “consider other options” imply? One obvious solution, adopted by the likes of Enterprise Products Partners (NYSE: EPD) and Genesis Energy (NYSE: GEL), would be to have the operating partnership buy out its general partner.

Given that Kinder Morgan Chairman and CEO Richard Kinder is heavily invested in KMI and not so much in KMP, and that the current arrangement hugely benefits KMI at KMP’s expense, you don’t need to be a total cynic to expect that such a deal would offer KMI shareholders a healthy premium.  

A less drastic option would be to enlarge the incentive distribution discounts KMI has granted KMP from time to time to offset the effect of share issuance from distributions.

The trouble is that such discounts have always been designed to diminish over time, while the incentive distribution rights scheme means that the total owed to KMI will only grow. It’s a perverse incentive structure that would reward KMI even if its management caused KMP to build a bunch of new infrastructure that it knew would never recoup the investment. And legally, it might be within its rights to do so:

Now, I believe Rich Kinder is an honorable man. I believe he understands that KMI’s long-term future depends on fair returns to KMP’s limited partners. That may be why KMP has traded better than KMI over the last six months, so far this year and since releasing the reduced growth outlook.

We already have both KMI and KMP rated as Holds, and see no reason to sell here ahead  a likely reacceleration in two or three years, when the recently heavy capital expenditures should start to pay dividends. But this is also no time to increase exposure to these names, because three years is  long time, and rising rates and drooping valuations pose serious risks to an entity betting huge on growth. Is that a killer of a problem? Probably not. But it’s a risk that has to be respected.