A story posted on Bloomberg's terminal based subscription service on September 1, 2010 mentions an interesting tidbit about Quicksilver Gas Services (KGS) that I had not seen disclosed before. The piece is titled "Moody's assigns B2 CFR to First Reserve Crestwood Holdings." The story summarizes a Moody's rating report on the debt Crestwood issued to purchase its stake in KGS. The story notes,
Following the acquisition and the planned conversion of a note receivable from KGS into common units, Crestwood will own 100% of the general partner (GP) interest and approximately 62.5% of the common units in KGS.
The new piece of information in that sentence is that Crestwood is going to convert the note receivable into common units.
Since this is the first time I have read about the plans to convert the note to equity I went back through the most recent 10Q to see if it was mentioned. I did not find a direct reference to this, but I did notice that the difference between basic units (28.5M) and diluted units (32.0M) shown at the bottom of the income statement is just about the amount by which the common units would be diluted if the note had been converted at the 6/30/10 common unit price of $19.
The difference between the basic shares and diluted shares in the previous 10Q was much smaller, which indicates that plans were made to convert the note after the Crestwood transaction was announced.
As of 6/30/10 this item was listed on the balance sheet as a "Note Payable to Quicksilver" and had a balance of 53,927K. Quicksilver Resources (KWK) disclosed the balance on the note is now approximately $58M in their 10/1/10 announcement that the sale of their stake in KGS has been completed. Assuming the note is converted to common units at the current price of $24.5 per unit, that would create 2,367,347 new common units (58,000,000 / 24.5).
If the conversion of the notes was included in the CFO's projection that KGS would pay out $14.5M to the GPs in 2011, then that implies a quarterly distribution per common unit of $0.53 in 2011. Previously, I had forecast a quarterly distribution of $0.54 per common unit in 2011. While the conversion of this note is dilutive to common unitholders, it not that big of a deal and I am maintaining my price target of $30 on KGS. See my previous article on KGS for more detail.
Note: Common unit is the term used when referring to the common shares of an MLP. Distribution is the term used when referring to dividends paid out by an MLP.
Disclosure: Author is long KGS