Kinder Morgan's Dividend Payout Rate Is Unsustainable

Investors are increasingly turning to dividend stocks as the financial collapse of the past year has made many investors more risk-averse. Even in light of the recent positive economic indicators and corporate earnings, there is still significant uncertainty surrounding the direction of the stock market.

For the stockholder, investment returns come from two portions: capital gains and dividends. In today’s business environment capital gains, even for financially sound companies, are far from certain while dividends from such companies are more assured and recur with frequency (usually quarterly).

This knowledge may lead investors to merely run a stock screener to invest in those stocks paying the highest dividend yield and sleep well picturing the relentless flow of dividend checks filling the mailbox. If only it were that easy.

One company with an eye-catching dividend yield is Kinder Morgan Energy Partners (KMP), which is currently yielding 7.7% and was yielding as high as 8.2% in the middle of this month. It is certainly hard to resist a “guaranteed” return of eight percent but it is necessary to dig a little deeper below the surface in analyzing the company.

KMP is an owner and operator of petroleum (8,300 miles) and natural gasoline (14,300 miles) pipelines in the United States. In fact, KMP is the largest independent transporter of refined petroleum products and independent terminal operator.

Since KMP operates pipelines/terminals and collects fees for the right to use its facilities it typically does not take title to the pipeline products so the commodity price risk and business inventory property tax/liability exposures are limited compared to investing in Exxon Mobil Corp. (XOM).

Naturally one may expect deliveries to fall with demand as oil increases in price but KMP is relatively insulated from volatile commodity pricing.

In analyzing KMP as a potential dividend play, I reviewed various financially strong companies with robust yields and the ability to continue/grow payment in the future.

Since the goal is income, it is logical to begin by looking for a high yield. Typically a yield of two to six percent is acceptable depending on the industry.

Once the yield begins to creep above six percent, the sustainability of this yield starts to come into question. In this case, KMP’s 7.7% yield is very high: management has recognized this and they are keeping the quarterly dividend flat at $1.05 per share. To gauge the sustainability of the dividend, an invaluable ratio is the payout ratio that compares earnings per share to dividend per share.

Naturally, the lower the payout ratio, the better as it indicates that the company can afford to payout dividends just from earnings. KMP’s payout ratio is an outrageously high 275% TTM.

In the first quarter of 2009, EPS was $.15 versus dividend per share of $1.05, resulting in an astronomical ratio of 700%. A rule-of-thumb for a sustainable payout ratio is less than 75%.

With a market capitalization of over $10B, KMP passes my size threshold of $2.5B with flying colors. This requirement is less strenuous but helps to ensure that the company is well established and improves its ability to raise financing if necessary.

I would lower this requirement if the right investment opportunity appeared; however, I would still maintain a minimum of $1B (there is a time and a place in your portfolio for sub-$1B companies depending on your risk tolerance but not when looking for dividends).

KMP also clears the next hurdle of a long dividend payment history with ease as the company has been paying a dividend for over ten years. I would not pursue a dividend play if the company lacked at least two years of dividend paying history.

Analyzing the financials with an eye on dividends is much narrower in focus than conducting an in-depth financial analysis. Specifically, you are interested in the company’s ability to pay the dividend in the future so key balance sheet items are cash and short-/long-term debt. KMP has a tiny cash position ($65M), poor liquidity ratios (current and quick ratios of .5 and .6, respectively), and increasing debt.

The oil and gas pipeline industry typically pays large dividends so this does not cause alarm. For example, a high-tech growth company that pays dividends would be a red flag.

Lastly, I examine the intangibles such as management. Management owns approximately ten percent of the company and has not been selling shares. Valuation indicates that KMP is trading at a premium to its industry group (PE of 37.4 versus 24.7).

One final intangible that I often check is the short interest as a percent of float. Different companies have different advantages and disadvantages and I suggest that you examine the intangibles until you are comfortable with your investment decision.

To summarize my dividend framework:

• Yield: 2 to 6%
• Payout Ratio: Less than 75%
• Size: $2.5B
• Dividend History: Minimum of two years of dividend payments
• Financials: Strong cash position/liquidity with minimal debt
• Industry Comparison: Industry position and “fit”
• Intangibles/Valuation: Management stake, short interest, valuation, etc.

Application of framework to Kinder Morgan Energy Partners:

• Yield: 7.8%
• Payout Ratio: 275%
• Size: $10B+
• Dividend History: 10+ Years
• Financials: Minimal cash, weak liquidity, rising debt
• Industry Comparison: Industry leader in dividend yield
• Intangibles/Valuation: 9% stake with recent purchases and no recent sales; PE premium

As a cautionary comparison, I present Penn West Energy Trust (PWE) and its 11.6% yield. This is another high yielding stock that was yielding over twenty percent late last year. As with KMP, PWE had what would appear to be an unsustainable payout ratio (among other problems such as quarterly losses) and it was forced to slash its dividend payments. Currently PWE is down over 55% YTD and its PE has fallen to five.

In conclusion, while KMP’s dividend is attractive, its dividend is unsustainable based upon its payout ratio and weak financial position. Should the dividend be cut, the multiple will fall causing this stock to fall out of favor.

Naturally, more research into KMP’s financials is necessary if considering KMP as a potential capital gains investment but it should be clear that this is not the type of stock that a dividend investor should put on the top of his or her buy list.

Sources:

• The Motley Fool Million Dollar Portfolio by David and Tom Gardner
• Motley Fool (KMP)
• YahooFinance (KMP)
• Beginners Invest (Dividend Trap)
• Contrarian Profits (How to Avoid the Dividend Trap)
• Pluto Studio (Image)
• TD Ameritrade (Chart)

Disclosures: I do not have any positions in KMP, XOM, or PWE.

Comments

[HSH15:]

This is drivel...MLPs as a sector have averaged around 7% yield since 1995, seems sustainable considering they have continued to pay out through 2000 bubble and 2008 crises...KMP is not an outlier, there are many midstream MLPs that offer sustainable yields with growth potential still left in them. KMP is too big to continue its track record of growth, but it can certainly maintain its distribution. I like PAA, BWP, EPB, MMP, CPNO, ETP, and many others more than KMP.

Jul 28 03:06 AM

[max12345:]

Paul: Your Penn West cautionary tale cuts both ways. For those who had bought Penn West earlier, you are right. For those who bought it after it cut its dividend to 11.8%, they are now collecting that 11.8% dividend (higher than KMP's) and are also looking at significant upside potential as oil and gas prices and volumes recover. So what's most important is to be aware of the arguments you have made and then watch one's entry timing. (but I agree with you regarding Kinder Morgan)

Jul 28 05:02 AM

[Justinthyme:]

Drivel is the correct characterization. Why would SeekingAlpha print something so silly.

Sustainability of an MLP's distribution (it's not a dividend) is a function of distributable cash flow, not net income.

Jul 28 07:06 AM

[mplaut:]

You cannot determine whether the distribution of a MLP is sustainable by looking at its payout ratio. You have to look at the free cash flow because straight profits can be whipsawed up or down.

KMP will have no problems sustaining its distribution.

LINE yields over 11% and will also be able to keep it up for the foreseeable future.

MLP distributions are also tax advantaged for the most part, but filing the return is more complicated.

Jul 28 07:07 AM

[cocomurph:]

"To gauge the sustainability of the dividend, an invaluable ratio is the payout ratio that compares earnings per share to dividend per share...."

Traditional "payout ratios" ( derived from looking at dividends versus earnings ) are NOT the proper measurement for MLP's ( Master Limited Partnerships ) "unit contribution" sustainability , since they are required to payout a high percentage of their cash flow in order to qualify for special tax treatment.

I suggest you do your homework as to the difference between C-corp stocks and MLP's before writing about them again!

Jul 28 07:50 AM

[sitting duck:]

KMP is required to pay out at least 90% of its distributable cash flow. This number will exceed income because of non-cash income statement add backs.

The investment community seems to exhibit a lack of understanding of energy MLP's. This is a 'good thing' because as that understanding becomes more clear, more investors will move investment capital into the MLP space. Capital appreciation will narrow the yield gap between MLP's and other yield orientated alternatives.

Jul 28 08:28 AM

[Dividend Gr...:]

I would second the comments of the last four commenters. KMP is an MLP and as such is required to pay out most of its earnings. What is important for MLPs is distributable cash flow, not EPS.
While KMP is big, it could still afford growing its distributions over time if it realizes efficiencies, acquires other pipelines and also as inflation adjustments raise the prices it charges companies to transport oil and nat gas.
If the company cut its IDR( incentive distribution rights) to 25% rom 50%, the distributions growth could be better off as well.

Could KMP cut its dividend? Sure it could. I doubt it would do it however, as this would enrage shareholders. Furthermore the pipelines are a boring business. Demand for nat gas and oil is not volatile at all - probably a one -two percent annual change in US demand in either direction is considered huge.

KMP is superior to PWE, since if PWE does not keep buying new exploration properties, it would earn nothing once it depletes its resources. furthermore PWE would lose its canroy status in 2011, after which its dividends would be much lower than today, since now it distributes most of its cash flow to unitholders.
KMP could go on as long as energy from oil and gas is needed in the US. KMP has stable and growing distributions, while PWE has volatile and shrinking distributions, dependend ot the prices of volatile commodities.

As an income investor I prefer stable and growing distributions, and a stable income stream.

Jul 28 09:00 AM

[wan65:]

Pauley.....C'MON MAN... maybe you should read about MLPs somewhere... this is something I would expect to see on Yahoo Message boards or something.

Jul 28 09:28 AM

[djj420:]

The comments here are reassuring, as I'm long KMP with a 27% capital gain. Two thoughts: could the rising debt he cited be a forerunner of some acquisitions, and could the author be trying to shake out longs so he can capture the next distribution on the cheap?

Jul 28 09:36 AM

[Ozarker:]

Paul--Have you considered sales?

Jul 28 09:56 AM

[dowjobber:]

A case of mistaken identity! KMP's cash flow for the past 12 months reported is $7.34 per share so the $4.20 distribution appears safe.
Note that this is not a corporation, it is a partnership and this stock does NOT pay a dividend by definition, but simply pays 90% of free cash flow. Young Mr Zambardo lacks accounting knowledge and is using some box cake formula for dividend sustainability which cannot be applied to MLPs.

Jul 28 10:00 AM

[Milt Woodward:]

Although most of the comments seem to take you to task for this analysis, most of the objections appear to question your application to KLM. Thanks for the general concepts of the article. I found it very helpful.

Jul 28 10:01 AM

[notsosmart:]

BOY-WHAT A WASTE OF TIME THIS ARTICLE WAS.

Jul 28 10:30 AM

[Emerald:]

I continue to see very bad analysis of MLP's and occasionally on REIT's because the writers lack the basic understanding that cash flow after debt service and required capex is the only real measurement for these companies. They are required to pay out most of their cash flow, hence the higher yields. Long: LINE, KMP, EPD, TPP, NGLS, EQR.

Jul 28 10:36 AM

[Brad Castro:]

On a sidenote, even though KMP is an MLP, you can still trade options on it - using a conservative approach of writing at the money or out of the money puts on 100 unit blocks in order to acquire those units at a discount to the current price, is something you should look into if you're considering a long term position in KMP or any other MLP.

That effectively lowers your cost basis (although for tax purposes it doesn't - and anyway, MLPs have different tax structures and consequences for investors). You don't need to, of course, but still, acquiring MLP units by writing puts can increase your effective yield on investments with an already high but sustainable payout.

Jul 28 10:36 AM

[rdp1:]

Paul: suggest you "try" to learn the difference between a royalty trust and a
master limited partnership. you simply mislead investors by being so er---dumb.
a royalty trust in the main owns resources and depletes them. thus the trust is in the exploration business, while the mlp, like KMP, is a transporter of the oil or gas, etc. MLP's ransportation rates are set by the US government allowing for a reasonable profit, but the royalty trusts are
only as good as the assets they discover.
Snd most of them are, as stated above, in Canada and the Canadian government changed its tax laws a couple of years ago and destroyed these companies.
how you earned the right to publish the garbage you wrote is beyond me.

Jul 28 10:47 AM

[searcher:]

A lot more thought and research needs to be given to a topic when presenting an article. This article reads like a poorly researched incomplete assignment from a finance sophomore. A little knowledge is a dangerous thing. However, it is less dangerous to be erroneously warned off an investment than to be touted a toxic cousin.

Jul 28 11:40 AM

[YaleBulldog:]

I am shocked that an article this absurd would be published. Does he realize that this isn't a game and that an individual investor with real money could be affected by this? The analysis is flawed to the point that it must be rejected out of hand by anyone with an inkling of knowledge about MLPs in general or KMP specifically.

Here is a history lesson for those investors who have only recently been following this stock. There was an article by a oil and gas analyst named McDep that came out in 2001 that had a similar premise in which he said that KMP was unsustainable, etc. It caused a panic in February of 2002. If you doubt me, look at the historical chart on yahoo finance for February 28, 2002. That chart doesn't capture the whole event because it only reflects the closing price of the stock. It actually opened much lower than $30 on that day. I called investor relations that day and the woman said that she had been flooded with calls from investors worried that KMP was going to be the next Enron (if you remember this was shortly after Enron and people were very skittish about anything to do with oil & gas). There were MANY investors that dumped their shares at deflated prices because of some idiot (that happened to be infinitely more qualified than this moron) writing an article like this.

Paul - you need to gain some real experience before you send out anything else. Something like this could end up hurting someone financially. THIS ISN'T A GAME!

Jul 28 12:21 PM

[Paul Zimbardo:]

Looks like I have sparked some debate which is always a good sign. Thank you for the positive feedback and constructive criticism. To those who chose to merely insult me for a) contributing to the community and b) trying to help other investors; that is your prerogative. I welcome constructive criticism and comments as that is the only way that we will all learn and grow. As always, make sure that you understand and are comfortable with any investment that you choose to make. While I typically like to respond to each comment individually, due to the overwhelming number of comments I will use a more general approach to responding.

First I would like to point out that I am familiar with Master Limited Partnerships; however, I have not analyzed any of these vehicles in the past. In retrospect I should have explained MLPs a little more thoroughly and stated why I believe the payout rate is unsustainable. I hope to do so in my comments. My primary source for research on MLPs is S&P, specifically the website below:

www2.standardandpoors....

First, I understand that they are really distributions rather than dividends and units rather than shares but the points I made are the same. I would also like to address the common misconception that MLPs must “pay out at least 90% of its distributable cash flow” as Mr. (or Mrs.) Sitting Duck and others mentioned in his/her comment.

In reality, MLPs “must GENERATE at least 90% of its income from qualified sources” and there is no requirement about distributions. In return for meeting this requirement, MLPs receive beneficial tax treatment (in sum, the MLP does not pay income taxes and instead each partner pays based upon their ownership stake, similar to an S-Corp). Based upon this critical distinction, MLPs yield is based on earnings just as much as it is upon cash flows. As you can see from KMP’s financials, revenues and cash flows have been steadily declining. No magically operating structure can permit this type of company to continue growing its earnings at its historic rate with these fundamentals.

This was the point that I was trying to stress: you need to analyze BOTH cash flows and earnings when investing in MLPs as there is no minimum cash flow payout requirement.

I am quite surprised at the number of comments that say that believe that MLPs have to payout 90% of their cash flows, what that is certainly not the case. Judging from the “+10” rating at the time of my writing this on Sitting Duck’s comment, I am forced to believe that this is the prevailing misconception among our community. At the very least, my article helped to correct a misconception. Maybe as I follow-up article I will write about MLPs in general, specifically: 1. What they are; 2. What the requirements are for this treatment are; 3. Benefits to this treatment; and 4. Disadvantages to this treatment. Thoughts?

You cannot ignore the underlying fundamentals of the company: revenue is falling, debt is rising, and the company is paying out more in dividends than it can afford to based upon its cash from continuing operations and used for investing activities (specifically, CapEx). Just look at the issuance of debt the past few years alone would have be alarmed if I were an investor.

In regards to Penn West, yes, every investment can “cut both ways” as for everytime someone sells, someone else is buying.

@djj420 I have no intentions of investing in KMP and it would be unethical for me to not disclose if I had intentions of investing in a company that I write about.

In closing, even if you still disagree with my analysis of MLPs or application of my framework to KMP, hopefully you can still appreciate my effort and use this framework when analyzing other high yield stocks. If I was able to help at least one other person (thanks Milt!), I believe my work was worth the effort. In the end, this will only help to make me a better writer and analyst.

Jul 28 12:24 PM

[User 145964:]

Natural gasoline pipelines??

Jul 28 01:18 PM

[OneRichOne:]

How about an analysis of the oil tanker business. FRO, NAT, VLCCF etc. I like your thinking but I still own and have owned MLP's for over 5 years and they almost all have treated me well. Check out APU and SPH. Both I've owned for 5 years and they are Up 20% + since I bought them.

Jul 28 01:38 PM

[bandanna:]

Reminder on MLP's - they do not pay "dividends" like stocks do. You are buying a partnership unit, not a share, and are basically a partner in their business but without decision making rights (or liability). Because of the tax code, they have to pay out a certain part of their cashflow in order to be treated as pass through entities and not taxed twice as are corporate dividend payments. The reason for the higher so-called "yield" is basically the elimination of the corporate tax. If they pay more than they expect to buy or build new assets, they can run the risk that the cash flow from them won't pay off the construction costs; they also have the risk of lower revenues. Reducing payouts typically results in difficulty raising capital to buy more assets, so they want to keep them as high as possible as long as possible. But it's a treadmill since you're paying out most of what you take in, growth capital and the abilty to sustain payouts comes from selling more units and/or borrowing more. Once you've received the equivalent of the price you paid for your units back in distributions, you are getting your initial investment back and will be into cap gains territory. Analyzing these like they are stocks can lead to incorrect conclusions sometimes. They are not buy and forget investments.

On Jul 28 03:06 AM HSH15 wrote:

> This is drivel...MLPs as a sector have averaged around 7% yield since
> 1995, seems sustainable considering they have continued to pay out
> through 2000 bubble and 2008 crises...KMP is not an outlier, there
> are many midstream MLPs that offer sustainable yields with growth
> potential still left in them. KMP is too big to continue its track
> record of growth, but it can certainly maintain its distribution.
> I like PAA, BWP, EPB, MMP, CPNO, ETP, and many others more than KMP.

Jul 28 02:43 PM

[bandanna:]

The rising debt could also be the result of major cost overruns on the REX and other projects that couldn't be recouped via higher throughput fees as those were set when the capacity was contracted with the initial shippers. During the past 3 years construction costs escalated at breathtaking rates. The shippers get a great deal in that they are capping their cost to ship and laying off the construction cost risk onto the transporter.


On Jul 28 09:36 AM djj420 wrote:

> The comments here are reassuring, as I'm long KMP with a 27% capital
> gain. Two thoughts: could the rising debt he cited be a forerunner
> of some acquisitions, and could the author be trying to shake out
> longs so he can capture the next distribution on the cheap?

Jul 28 02:51 PM

[roy schick:]

Please do not refer to "Distributions" as "Dividends". Also, did you realize that Kinder Morgan is building the largest pipeline in America from the Rocky Mountains to the east coast, a 40 inch diameter pipeline ? I think it is referred to as "The Rockies Express". When this is fully in service, there will be a big increase in revenue. Fortunately a lot of people reading here are very knowledgeable. I will leave it at that.....

roy schick

Jul 28 02:53 PM

[Smackdown:]

Paul,

You can spin this however you want, and I do appreciate your slight bit of humility here, but you were dead nuts mistaken in your analysis. Man up and admit the whole article is flawed. It must be tough to spend the time and effort you put into this and find out it was a colossal mistake. For the record, S&P is the worst source for MLP research. Not the primer that you linked but the sell side analyst, T. Shafi. Look at Shafi's track record of tragets and recommendations. Read what they write. They make the exact same mistake as you. It is a joke. MLPs like KMP/KMR float debt or issue stock to pay for their expansion projects. These projects accrete to their DCF. Modest leverage with MLPs is not a bad thing as the assets that were leveraged are midstream assets in are monopolistic. The MLPs will not commit to an expansion without firm committments. This reduces the risk.

For the record, Kinder Morgan is not one of my biggest holdings, nor am I a buyer at these levels. However, your article needed a firm rebuttle as it was so egregiously erroneous in its facts. There is no debate as you put it. You stated in black and white how dangerous KMP's distribution is based on lack of EPS coverage. This is wrong and there is no discussion. DCF is the metric. DCF. EPS is a hugely minor secondary metric that has had little impact in the 17 years I have been in the space. It is what it is.....

Please read this research piece by Bullmarket. It covers some basic points. www.bullmarket.com/dig...

On Jul 28 12:24 PM Paul Zimbardo wrote:

> Looks like I have sparked some debate which is always a good sign.
> Thank you for the positive feedback and constructive criticism. To
> those who chose to merely insult me for a) contributing to the community
> and b) trying to help other investors; that is your prerogative.
> I welcome constructive criticism and comments as that is the only
> way that we will all learn and grow. As always, make sure that you
> understand and are comfortable with any investment that you choose
> to make. While I typically like to respond to each comment individually,
> due to the overwhelming number of comments I will use a more general
> approach to responding.
>
> First I would like to point out that I am familiar with Master Limited
> Partnerships; however, I have not analyzed any of these vehicles
> in the past. In retrospect I should have explained MLPs a little
> more thoroughly and stated why I believe the payout rate is unsustainable.
> I hope to do so in my comments. My primary source for research on
> MLPs is S&P, specifically the website below:
>
> www2.standardandpoors....
>
>
> First, I understand that they are really distributions rather than
> dividends and units rather than shares but the points I made are
> the same. I would also like to address the common misconception that
> MLPs must “pay out at least 90% of its distributable cash flow” as
> Mr. (or Mrs.) Sitting Duck and others mentioned in his/her comment.
>
>
> In reality, MLPs “must GENERATE at least 90% of its income from qualified
> sources” and there is no requirement about distributions. In return
> for meeting this requirement, MLPs receive beneficial tax treatment
> (in sum, the MLP does not pay income taxes and instead each partner
> pays based upon their ownership stake, similar to an S-Corp). Based
> upon this critical distinction, MLPs yield is based on earnings just
> as much as it is upon cash flows. As you can see from KMP’s financials,
> revenues and cash flows have been steadily declining. No magically
> operating structure can permit this type of company to continue growing
> its earnings at its historic rate with these fundamentals.
>
> This was the point that I was trying to stress: you need to analyze
> BOTH cash flows and earnings when investing in MLPs as there is no
> minimum cash flow payout requirement.
>
> I am quite surprised at the number of comments that say that believe
> that MLPs have to payout 90% of their cash flows, what that is certainly
> not the case. Judging from the “+10” rating at the time of my writing
> this on Sitting Duck’s comment, I am forced to believe that this
> is the prevailing misconception among our community. At the very
> least, my article helped to correct a misconception. Maybe as I follow-up
> article I will write about MLPs in general, specifically: 1. What
> they are; 2. What the requirements are for this treatment are; 3.
> Benefits to this treatment; and 4. Disadvantages to this treatment.
> Thoughts?
>
> You cannot ignore the underlying fundamentals of the company: revenue
> is falling, debt is rising, and the company is paying out more in
> dividends than it can afford to based upon its cash from continuing
> operations and used for investing activities (specifically, CapEx).
> Just look at the issuance of debt the past few years alone would
> have be alarmed if I were an investor.
>
> In regards to Penn West, yes, every investment can “cut both ways”
> as for everytime someone sells, someone else is buying.
>
> @djj420 I have no intentions of investing in KMP and it would be
> unethical for me to not disclose if I had intentions of investing
> in a company that I write about.
>
> In closing, even if you still disagree with my analysis of MLPs or
> application of my framework to KMP, hopefully you can still appreciate
> my effort and use this framework when analyzing other high yield
> stocks. If I was able to help at least one other person (thanks Milt!),
> I believe my work was worth the effort. In the end, this will only
> help to make me a better writer and analyst.

Jul 28 04:28 PM

[Smackdown:]

Paul,

I apologize for my insulting tone. I was steamed that such an inaccurate article was posted and that it could effect peoples understanding of the already misunderstood (even by yourself) sector. Misinformation helps nobody. It hurts. It is nicely altruistic to try and help the community, but not with falsehoods and inaccuracies.

I applaud your desire to grow and improve. No hard feelings...

Good luck.


On Jul 28 12:24 PM Paul Zimbardo wrote:

To
> those who chose to merely insult me for a) contributing to the community
> and b) trying to help other investors; that is your prerogative.
> I welcome constructive criticism and comments as that is the only
> way that we will all learn and grow

Jul 28 04:35 PM

[Smackdown:]

Excerpted from www.bullmarket.com/dig...

How can MLPs pay out higher dividends than their earnings?

The answer to this question has to do with the way that depreciation and, in the case of natural resource producers, depletion expenses are treated. Depreciation and depletion expenses are a means of assigning the cost of a long-term asset, such as a pipeline or natural resources, over its useful life. These items are called "non-cash" expenses because cash is not actually being paid out for the depreciation or depletion of the long-term asset. A typical corporation must reinvest a substantial portion of its cash flow in order to replace its equipment, keep pace with technology, remain competitive, and/or expand its business. After these payments are made, any remaining cash flow can be paid out to shareholders in the form of dividends.
MLP assets, such as pipelines, however, are generally long-lived; require very little maintenance; and are not subject to major technological changes or physical deterioration. It is for these reasons that an MLP can pay out a very high level of its cash flow to unitholders without hurting the long-term basic earnings power of the business. This is also why investors should value MLPs based off metrics related to distributable cash flow (DCF) and not earnings.

What is Distributable Cash Flow (DCF) and why is it a better way to value MLPs than earnings and P/E ratios?

DCF is the cash flow available to the partnership to pay distributions to LP unitholders and the GP. While calculations can vary slightly between companies, it is basically adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) with interest expenses, taxes, and maintenance capital added back in. Maintenance capital is added back in because that is the part of a company's CapEx (capital expenditure) budget that is needed to sustain current operations and cash flow, while growth capital (the other component of CapEx) is used to expand operations and increase cash flow.
Since DCF strips out all non-cash items, it is a truer measure of how much cash an MLP is generating and whether it can continue to pay out or increase its dividend. Thus, DCF-based metrics are better measures to use in the valuation of MLPs compared to earnings-based measures, which include non-cash items.

What is a coverage ratio and why is it important?

The coverage ratio is basically an MLP's distributable cash flow available to common unitholders divided by the distribution paid out to common unitholders. It is important because it illustrates the cushion an MLP has to pay its dividends. Typically, MLPs that are more energy (natural gas processors) or weather sensitive (propane marketers) carry higher coverage ratios than companies with higher fee-based businesses. Companies with higher coverage ratios have more flexibility to grow the business without taking on more debt and/or raising the current dividend.

Why is Debt/EBITDA an important metric to be aware of?

One common criterion for debt covenants is a company's debt/EBITDA level. If the level is too high, it could make a debt default more likely. Also, it shows how leveraged an MLP currently is. The less leverage an MLP has, the more flexibility it has to lever up and expand

Jul 28 04:39 PM

[You're Kidding:]

The Wachovia MLP Primer (Third edition, July 14, 2008) may be the best detailed discussion of MLPs around. I would recommend anyone seriously interested in investing in what is probably the best investment the market has to offer, to read and study it. (You especially need to do this if you want to write about the subject.)

After spending 9 months full time investigating the market and the related meltdown, I put 100% of a mid 6 figure inheritance into 7 MLPs: ETE, NRGP, EPE, NSH, BGH, LINE, and CPNO (that's right, 100%.) 60% of that went into the General Partners of investment grade, midstream pipeline and storage MLPs (including the one propane MLP,) which all increase their distributions much faster than their underlying MLPs.) I sleep easily at night knowing all my money is in extremely safe enterprises that are not going to go out of business in the foreseeable future, and will continue not only generating high distributions (10.4% on my initial portfolio purchase price) but will continue INCREASING those distributions over time as they have been doing for years, (especially once the recession is behind us.)

"Diversification" did how good of a job protecting equities in the last year? That's right, ABSOLUTELY NO GOOD. In fact, it guaranteed disaster.

Wall Street is full of wonderful suggestions that are meant to make Wall Street lots of money, not protect investors. You pay attention to the likes of Goldman Sachs' "recommendations" and "insights" at your own peril.

You must do your own due diligence and listen to nobody (including me) whose advice you cannot confirm for yourself. So, prove to yourself that the following investment advice is the best you will ever receive:

1) Think LONG TERM. How many more years will you be alive? I'm 63 and I could be alive another 25 or 30 years. Just about EVERYONE should think long term. Remember the race between the tortoise and the hare? Who won?

2) Think DIVIDENDS and DISTRIBUTIONS. Academic studies have shown div /dist stock investing has always beat non div/dist stock investing.

3) REINVEST (compound the interest) as much of the income stream as possible (ALL if you can) right back into your portfolio.

4) Think MLPs. The incredible tax advantages, the high dividends, the solid businesses, are irresistible and REAL.

5) Pay less attention to capital gains and more to divs/dist. This will set up a "cash flow engine" that will far outpace mere capital gains in the long run. Keep in mind that a portfolio which pays a 10% yearly div/dist, with div/dist and stock/units also rising 10% yearly, generates a cash flow engine that doubles the value of a portfolio about every 4 years! (not counting taxes or inflation - use this example for comparison purposes with other investments.)

These five points will make you rich if you do your DD and they will put a big smile on your face. Your future will be assured.

To get started learning about compound interest with a visceral feel, go here to see a color, graphical, real time (with sliders - no need to enter numbers) compound interest calculator, which will allow you to play with various scenarios like distribution rates, inflation, taxes etc.

personal.fidelity.com/...

Oh, and when everybody else believes in the same thing (ie "diversification," "property values always go up," "the US economy is the best and safest in the whole world," etc., etc.,) don't blindly accept it!

Good luck!

Jul 29 01:00 AM

[cocomurph:]

"Based upon this critical distinction, MLPs yield is based on earnings just as much as it is upon cash flows..."

Absolute bull! Trying to defend the original article's yield calculation ( "dividend" divided by EPS ) is totally wrong. If the point you'd like to make is that the KMP's coverage of it's "distribution" might be lower in the future due to less distributable cash flow...fine. Do the math right!!

Jul 29 07:16 AM

[KSAccountant:]

I have appreciated the discussion about KMP and MLPs in general. I had once looked at KMP but did not like their properties or debt position as much as I liked OKS. However, OKS recently offered more shares to the public (essentially diluting my ownership) which bothers me. I continue to hold OKS because I take a long-term approach like "You're Kidding" and see that in 20 to 30 years the US Dollar will be crap and natural gas prices will return to record highs. I could be totally wrong which is why I ask all those who commented on KMP and MLPs in general for thoughts on OKS. I also hold PAA.

Jul 29 11:31 AM

[bern7744:]

the editor of this blog should be fired.What drivel Did he ever hear of distributable cash flow? This is horrible misinformation.The writer sounds like a 8th grader .Is there an ulterior motive here?Did somebody short KMP?

Jul 29 01:44 PM

[babajay:]

Pretty amazing... I thought I missed something... What the HECK does EPS have to do with it. As long as Cash flow can cover the dividend, there is nothing to worry about. This article however does not cover Cash Flow at all. Simply saying the payout ratio was 700% tells me nothing. That is obviously an aberration. Could there have been a non recurring event that quarter..? Clearly the possibility exists that this is sustainable since the author himself points out that they have been paying continuous dividends for 10 years.


On Jul 28 07:06 AM Justinthyme wrote:

> Drivel is the correct characterization. Why would SeekingAlpha print
> something so silly.
>
> Sustainability of an MLP's distribution (it's not a dividend) is
> a function of distributable cash flow, not net income.
>
>

Jul 29 03:07 PM

[Chancer:]

"You're Kidding", I agree with your thinking.

I own KMR instead of KMP, because it pays the dividends in stock. I avoid current tax and its complications. I do not need the cash income, right now. I like that my average cost basis declines every quarter when I receive additional shares. I increase my shares with no out-of-pocket cash. If I need the cash in the future, I can sell some shares and pay the capital gains tax when I choose.

Kinder Morgan continues to grow through acquisitions and building new projects. I expect dividends for KMP and KMR to increase in the future based upon revenue increases.


On Jul 29 01:00 AM You're Kidding wrote:

> The Wachovia MLP Primer (Third edition, July 14, 2008) may be the
> best detailed discussion of MLPs around. I would recommend anyone
> seriously interested in investing in what is probably the best investment
> the market has to offer, to read and study it. (You especially need
> to do this if you want to write about the subject.)
>
> After spending 9 months full time investigating the market and the
> related meltdown, I put 100% of a mid 6 figure inheritance into 7
> MLPs: ETE, NRGP, EPE, NSH, BGH, LINE, and CPNO (that's right, 100%.)
> 60% of that went into the General Partners of investment grade, midstream
> pipeline and storage MLPs (including the one propane MLP,) which
> all increase their distributions much faster than their underlying
> MLPs.) I sleep easily at night knowing all my money is in extremely
> safe enterprises that are not going to go out of business in the
> foreseeable future, and will continue not only generating high distributions
> (10.4% on my initial portfolio purchase price) but will continue
> INCREASING those distributions over time as they have been doing
> for years, (especially once the recession is behind us.)
>
> "Diversification" did how good of a job protecting equities in the
> last year? That's right, ABSOLUTELY NO GOOD. In fact, it guaranteed
> disaster.
>
> Wall Street is full of wonderful suggestions that are meant to make
> Wall Street lots of money, not protect investors. You pay attention
> to the likes of Goldman Sachs' "recommendations" and "insights" at
> your own peril.
>
> You must do your own due diligence and listen to nobody (including
> me) whose advice you cannot confirm for yourself. So, prove to yourself
> that the following investment advice is the best you will ever receive:
>
>
> 1) Think LONG TERM. How many more years will you be alive? I'm 63
> and I could be alive another 25 or 30 years. Just about EVERYONE
> should think long term. Remember the race between the tortoise and
> the hare? Who won?
>
> 2) Think DIVIDENDS and DISTRIBUTIONS. Academic studies have shown
> div /dist stock investing has always beat non div/dist stock investing.
>
>
> 3) REINVEST (compound the interest) as much of the income stream
> as possible (ALL if you can) right back into your portfolio.
>
> 4) Think MLPs. The incredible tax advantages, the high dividends,
> the solid businesses, are irresistible and REAL.
>
> 5) Pay less attention to capital gains and more to divs/dist. This
> will set up a "cash flow engine" that will far outpace mere capital
> gains in the long run. Keep in mind that a portfolio which pays a
> 10% yearly div/dist, with div/dist and stock/units also rising 10%
> yearly, generates a cash flow engine that doubles the value of a
> portfolio about every 4 years! (not counting taxes or inflation -
> use this example for comparison purposes with other investments.)
>
>
> These five points will make you rich if you do your DD and they will
> put a big smile on your face. Your future will be assured.
>
> To get started learning about compound interest with a visceral feel,
> go here to see a color, graphical, real time (with sliders - no need
> to enter numbers) compound interest calculator, which will allow
> you to play with various scenarios like distribution rates, inflation,
> taxes etc.
>
> personal.fidelity.com/...
>
> Oh, and when everybody else believes in the same thing (ie "diversification,"
> "property values always go up," "the US economy is the best and safest
> in the whole world," etc., etc.,) don't blindly accept it!
>
> Good luck!

Jul 29 03:58 PM

[Finalword:]

May I sincerely request that the next time you prepare a financial piece on dividends that you run it past an editor schooled in finance. You cannot compare apple and oranges as you have done in this discussion and a decent editor would have shot you before you humiliated yourself so badly. You have writing potential, but perhaps finance is not your field. JMHO.

Jul 29 04:36 PM

[mared:]

What astounds me about the writer of this article is not only his ignorance but of his total unawareness of the fact that there are different business structures implied in the very name of the business.
XYZ Co., XYZ Partnership and XYZ Trust are all different. And different metrics apply.
I don't fault him for not knowing the structure and rules of a master limited partnership; that can easily be researched. I fault him for not noticing the name of a business he's writing about and not knowing that businesses have different structures.
Someone who thinks every business is a corporation has no business writing an evaluation on any business.

Jul 29 04:51 PM

[roy schick:]

One thing about the internet:: Often, the comments from readers are more accurate than the article. This was an incredibly poor article, full of inaccuracies. The readers of Seeking Alpha deserve better.

Jul 30 10:47 AM

[roy schick:]

I have a B.S. in Finance & Accounting from Lehigh University and over three years of personal investing experience. I actively follow stocks and I focus on dividend stocks as well as value stocks. In addition, I utilize relatively safe option strategies such as covered calls and cash secured puts to generate additional income. (Quote from Paul ). Paul, I also believe you graduated from Lehigh University in 2009.
Paul, I would suggest, as gently as possible, you were over your head in writing this article. I will not criticize you for writing it, but I will severely criticize your editor for allowing it to be printed in it's present form. This did a great disservice to the reputation of Seeking Alpha. It, however, did get us "Distribution" receivers energized. Personally, I have been receiving "Distributions" from the Santa Fe Pacific Pipe days, prior to Rich Kinder buying us out. This was twenty some years ago. I will not go there......

Jul 30 01:48 PM

[vloscomp:]

Thanks for the article, teaches me something about MLP.

Jul 30 03:38 PM

[Wisdom vs. ...:]

i understood that KMP is measured by cash flow, but even as a shareholder i did not know everything about mlp that i just learned from reading the comments. so maybe more people should write ridiculous articles...

KMP is hurting (relatively) because they cannot sell all that CO2 that was a hot well completion stimulation commodity in the boom. You can take a wild guess what they will do with all that extra CO2 if you study their history

Jul 30 03:53 PM

[2contango:]

It's a bit more complex than your analysis suggests. First KMP is a MLP. The partnership pays no taxes. The unit holder does. That makes the cost of capital lower.

Payouts are distributions, not dividends. As such, 80% to 90% of the payout is a cash distribution that reduces cost basis.

Cash distributions are much higher than earnings primarily because of depreciation and other tax benefits.

MLPs simply can't be compared to corporations when it comes to distributions.

Jul 30 04:15 PM

[strovej1:]

The opportunities in MLPs continue to present themselves. A big part of the inefficiencies in this market are a direct result of their being, primarily, a retail product. As such, they are more prone than most to flawed analyses from amateur investors and income seekers. i have been investing in MLPs for a long time and, outside the government changing their tax status or a complete shut down of the capital markets for a period of greater than 2 years, they will continue to be excellent investments.

However, they are not as simple as many people are lead to believe, and the rules for valuing these companies are quite different from your average dividend paying corporation. The analysis presented above is a well-stated case for commonly held misconceptions about MLP valuation and investing. The author should go back to the drawing board and learn about this special sector of the market, as I think he has the energy and intelligence to understand them and, ultimately, present an article that is interesting.

Had he presented a case for ENP or DPM to decrease or eliminate their distributions in the short run, I would have found that interesting. However, to pick KMP (the grand-daddy of MLPs and one of the least exposed to business risk) was a major error and reveals the author's fundamental lack of knowledge in this area. Also, to refer to KMP's distribution as "high" compared to the MLP universe shows that the author did not, in fact, look at the universe of MLPs. I would refer him to alerian.com to see a comprehensive list of MLPs. He should start his research there. They have an excellent primer on MLPs (the Wachovia primer is decent as well).

He will also discover that "payout ratio" is not the important metric for MLP distributions. I recommend that he looks into the metrics of "coverage ratio" and "distributable cash flow".

It was a nice try, though. Sorry you had to wade into a niche area with an inapplicable analysis. Good luck next time.

Jul 30 04:25 PM

[Be Rational...:]

Now that others have done the job of beating Paul to death, let's try and address some other points people have raised in the comments. As for Paul ... dude, take the bashing in the learning spirit and it will pay you rich dividends (...or should I say distributions) in the long run.

On "KSAccountant":

"However, OKS recently offered more shares to the public (essentially diluting my ownership) which bothers me. I continue to hold OKS because I take a long-term approach like "You're Kidding" and see that in 20 to 30 years the US Dollar will be crap and natural gas prices will return to record highs. I could be totally wrong which is why I ask all those who commented on KMP and MLPs in general for thoughts on OKS. I also hold PAA. "

It is common for MLPs to dilute stock to raise capital. Although annoying, the raised capital helps MLPs take steps towards their growth. This is important since they don't retain much of the cash flow. If used efficiently, the capital raised by dilution could be accretive to the cash flow in years to come. So it comes down to what the MLP plans on doing with the proceeds of additional shares.

Read point #5 in "You're Kidding" comment above.

In another excellent comment above by "Smackdown" you will find a link to a report from Bullmarket.com. Read that to understand what OKS does and what its exposure is to commodities is - that would be your risk (natural gas prices are sucking the life out of everyone right now, but things will hopefully change in a year or so). Other than that OKS has an excellent coverage ratio and is a solid stock in my opinion.

I would also like to point out that not all MLPs have been happy stories. Look up EROC and BBEP and see how the unit price was annihilated when distributions were reduced/cut. BBEP has recovered a bit, but EROC is still beaten down.

Long: KMP, EPD, ETP, PAA, LINE, MWE, NGLS, and TLP

Jul 30 05:36 PM

[beaux:]

Like many SA articles, there is learning to be gained from reading the posts. I, for one, am impressed at the knowledge of the those commenting. So, once again there is wisdom available. It simply resides in the comments section. Fair enough.

Jul 30 09:53 PM

[maryanne:]

What a scary title. thanks to all the commenters for correcting the story. I have lot of MLPs all doing well, scooped up at the bottoms of Nov and Feb.

Jul 30 10:08 PM

[clarkenn:]

SA editors should remove the article, but leave the comments!

Jul 30 11:38 PM

[Juliet:]

Be Rational: Fair amount of insider buying at OKS, generally a good sign:

VAN LUNSEN GIL J Director 2009-06-23 Buy 1200 $43.26 16.11
DINAN CURTIS EVP, CFO & Treas. 2009-06-17 Buy 2500 $44.02 14.11
GIBSON JOHN WILLIAM Policy Committee Member 2009-06-17 Buy 5000 $44.44 13.03
PETERSEN GARY N Director 2009-03-11 Buy 3000 $36 39.53
Lawhorn Caron A SVP & Chief Acctg. Officer 2009-03-06 Buy 265 $37.1 35.39
DINAN CURTIS EVP, CFO & Treas. 2009-03-03 Buy 3000 $39.75 26.36
BARKER JOHN R EVP, General Counsel, Sec 2009-02-13 Buy 167 $50.15 0.16

Jul 31 02:14 AM

[roy schick:]

Totally agree with "Leave the comments, remove the article."

Jul 31 06:57 AM

[KCN:]

Can somebody tell this guy to read up the tax code on MLPs? REITs? Trusts?

If he keeps writing, may be his university will take the business degree back!

Jul 31 09:32 AM

[weiwentg:]

Paul, you've already been excoriated for your confusing earnings/distributable cash flow for MLPs. So, I'll leave that bit alone. I will say, though, that KMP has been issuing a lot of units to fund acquisitions (all MLPs must issue units to generate funds, since they can't retain earnings).

This by itself isn't a problem. However, the general partner (which used to be publicly traded under the ticker KMI but was bought out by private equity) is currently entitled to 50% of the incremental cash flows distributed by the limited partner. This is known as being in the high splits; there are several lower tiers to incentivize the GP (which manages the pipeline) to raise distributions as fast as possible. However, when the LP issues units, the LP has to raise its distributions, and again, the GP gets 50% of the incremental distributions.

I think KMP's assets are very stable and long-lived, and that they'll be able to maintain their distribution. However, I expect distribution growth to tail off. They won't be able to sustain their past growth rates.

Jul 31 10:58 AM

[rdp1:]

Hard luck story....I bought my first shares of
KMP in April 2000 at a split adjusted price of 19 when the MLP was paying 32.5 cents per
share. Today KMP is 52 and pays 1.05 quarterly. Over the years I have added to the position, so my average cost is 31. In 9 years I have received approximately my cost back in distributions and paid a small amount of taxes. KMP is up over 50 % and the distributions add another 100 %....
and I still hold the security. And this is at a time when the DOW and S&P are down...
I love KMP and I especially love Rich Kinder.
Paul, suggest you request Seeking Alpha have more customer testimonials to the beauty of investing in MLP's, because obviously you have no idea what you are writing about. Perhaps an MBA might be in order...or some common sense.

Jul 31 11:04 AM

[KCN:]

I agree with your comment, especially for Paul to go do his MBA. I can say the same for my investment in MLPs and not just KMP but a few.

MLPs are weird animals and any MLP can go in difficulty like any business, especially, those involved in E & P, just look at CEP. If oil/gas demand crashes, there is no use of pipes, nor enhanced recovery etc. Oil majors can pay high distributions if they were to restructure to MLP, though probably unmanagable. So the majors sell off assets that can be managed in MLPs. SXL is one example.

On Jul 31 11:04 AM rdp1 wrote:

> Hard luck story....I bought my first shares of
> KMP in April 2000 at a split adjusted price of 19 when the MLP was
> paying 32.5 cents per
> share. Today KMP is 52 and pays 1.05 quarterly. Over the years I
> have added to the position, so my average cost is 31. In 9 years
> I have received approximately my cost back in distributions and paid
> a small amount of taxes. KMP is up over 50 % and the distributions
> add another 100 %....
> and I still hold the security. And this is at a time when the DOW
> and S&P are down...
> I love KMP and I especially love Rich Kinder.
> Paul, suggest you request Seeking Alpha have more customer testimonials
> to the beauty of investing in MLP's, because obviously you have no
> idea what you are writing about. Perhaps an MBA might be in order...or
> some common sense.

Jul 31 11:43 AM

[Trace Mayer:]

@145964, I think it is organic also and receives tax breaks as being part of the green economy.

Paul, in all seriousness, you may want to take your stripes with this one and learn. Passion and diligence are essential traits for being a successful financial commentator and I think you have both. You do need to tighten your arguments, use more relevant analogies, refine the organization, polish the language and correct the factual ambiguities and errors. We work with words and they are to be clear, concise and accurate.

For example, PWE is not a 'stock' but it is 'an open-ended, unincorporated investment trust'. Stocks are shares of ownership of a company. PWE is a trust with units.

It takes courage, or stupidity, to throw your ideas into the battlefield for public scrutiny. The Seeking Alpha audience is very sophisticated. Poorly communicated or weak ideas get thrashed pretty quickly. Most read, few comment and the rare elite actually craft an article for publication. Critics are people with no legs who tell people how to run.

With experience the better your writing will become and the larger your audience. But tasty investor food attracts plenty of trolls and haters. I know as I get plenty because of my subject matter. But do not mistake the trolls for genuine constructive criticism, which I think the majority of the comments have been. Take your lumps with this article and keep on trucking; it will be water under the bridge in a week.


On Jul 28 01:18 PM User 145964 wrote:

> Natural gasoline pipelines??

Jul 31 12:55 PM

[MLP_Noob:]

Very impressed with the knowledge/experience of the commenters here (perhaps the point is made and its time to give the author a break).
I find MLPs attractive but the discussions on tax complications elsewhere scary. So a few newbie questions:
1) Folks holding MLPs in taxable accounts: is the K-1 a big pain come tax time? or not?
2) Folks holding MLPs in tax sheltered accounts: have you ever had more than $1000 UBTI reported? What's the consequence? Typically what acct size should one have to worry about this?
3) Recommendations for solid MLPs would be much appreciated. I am looking at NAT, KMR, EEQ, LINE.
Thanks
MLP_Noob

Jul 31 04:13 PM

[andruomail:]

I might be mistaken but I remember reading about some MLP etf's that handle the tax paperwork for you, and also they're naturally diversified in the mlp space. FEN is one such etf but I forget which was at the top of my list.


On Jul 31 04:13 PM MLP_Noob wrote:

> Very impressed with the knowledge/experience of the commenters here
> (perhaps the point is made and its time to give the author a break).
>
> I find MLPs attractive but the discussions on tax complications elsewhere
> scary. So a few newbie questions:
> 1) Folks holding MLPs in taxable accounts: is the K-1 a big pain
> come tax time? or not?
> 2) Folks holding MLPs in tax sheltered accounts: have you ever had
> more than $1000 UBTI reported? What's the consequence? Typically
> what acct size should one have to worry about this?
> 3) Recommendations for solid MLPs would be much appreciated. I am
> looking at NAT, KMR, EEQ, LINE.
> Thanks
> MLP_Noob

Jul 31 06:48 PM

[Trevose_Lion:]

Can anyone explain the difference between NRGP and NRGY and which would be the better investment choice for an IRA or non-IRA account?

Jul 31 09:50 PM

[KCN:]

MLP_Noob

1. With Turbo Tax, K-1 is straight forward for most MLPs. However, it pays to know what a partnership is, and how it is taxed, as well as the role of limited partner.

2. If UBTI exceeds $1000 (I think from all MLPs combined, not a MLP), you pay taxes from the tax-sheltered account, and it is originated by the custodian of the account. Not all custodians are happy to do this.

3. No comment.

On Jul 31 04:13 PM MLP_Noob wrote:

> Very impressed with the knowledge/experience of the commenters here
> (perhaps the point is made and its time to give the author a break).
>
> I find MLPs attractive but the discussions on tax complications elsewhere
> scary. So a few newbie questions:
> 1) Folks holding MLPs in taxable accounts: is the K-1 a big pain
> come tax time? or not?
> 2) Folks holding MLPs in tax sheltered accounts: have you ever had
> more than $1000 UBTI reported? What's the consequence? Typically
> what acct size should one have to worry about this?
> 3) Recommendations for solid MLPs would be much appreciated. I am
> looking at NAT, KMR, EEQ, LINE.
> Thanks
> MLP_Noob

Aug 01 04:55 AM

[KCN:]

Paul,

You are making a classic mistake in comparing depriciating and depleting asset based MLP to a corporaton. MLP by its articles of formation may be required to pay out all the cash flow or 90% of the cash flow... In theory, and in time, all MLPs would have exhausted depriciation and depletion, but it still may be able to generate cash flow, possibly indefinately as fully depriciated pipe may still work and there is a demand for its connectivity.

Aug 01 05:04 AM

[User 466339:]

sad that this guy is allowed into SeekingAlpha

Aug 04 04:59 PM