Why is Kinder Morgan Management, LLC (NYSE:KMR) a better choice for our portfolio? Because we hold KMR in our taxable account. It is our only position in the taxable non-retirement account. My wife and I will live off of our taxable account for the next 4 1/2 years, selling KMR shares when needed. This will diminish the taxable account. KMR pays a stock dividend that is not taxed. The only tax consequences of owning KMR are incurred when one sells shares. Gains are treated as capital gains tax. Since I have sizable past carry forward losses (from trading internet stocks in 1998-2000 and other trading), they will offset any capital gains from KMR for quite some time. Therefore, my taxable account is a non-taxable account until my past carry forward losses are used up at which point I would of course owe capital gains tax on any subsequent gains. I would love to not deplete our taxable account. I calculated that KMR is giving me an approximate effective yield of 11%, as the share dividends/distributions are not taxed.
Selling AGNC ( taxed as ordinary income) in my taxable account and replacing it with KMR will result in zero taxes in our taxable account because KMR pays its distribution in shares. Because holding KMR results in zero taxes, its effective yield is equal to the yield I was receiving from AGNC (ordinary income tax).
How I decided to buy KMP:
From the Kinder Morgan Web Site:
Kinder Morgan is the largest midstream and the fourth largest energy company (based on combined enterprise value) in North America. We own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals. Our pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more. We also store or handle a variety of products and materials at our terminals such as gasoline, jet fuel, ethanol, coal, petroleum coke and steel.
In most of our businesses we operate like a giant toll road and receive a fee for our services, generally avoiding commodity price risk. Our customers include major oil companies, energy producers and shippers, local distribution companies and businesses across many industries. We invest billions of dollars each year to build new energy infrastructure and expand existing assets, as well as on integrity management programs to operate our assets safely.
The Kinder Morgan family of companies has four publicly traded entities:
Kinder Morgan, Inc. (NYSE: KMI), Kinder Morgan Energy Partners, L.P. (NYSE: KMP) (one of the largest publicly traded pipeline master limited partnerships in America), Kinder Morgan Management, LLC and El Paso Pipeline Partners (NYSE: EPB). Combined, the Kinder Morgan companies have an enterprise value of approximately $110 billion.
Kinder Morgan Energy Partners Increases Quarterly Distribution to $1.39 Per Unit, up 5%
Distributable Cash Flow 11 Percent Higher Than Second Quarter 2013
HOUSTON--(BUSINESS WIRE)--Jul. 16, 2014-- Kinder Morgan Energy Partners, L.P. today increased its quarterly cash distribution per common unit to $1.39 ($5.56 annualized) payable on Aug. 14, 2014, to unitholders of record as of July 31, 2014. This represents a 5 percent increase over the second quarter 2013 cash distribution per unit of $1.32 ($5.28 annualized) and is up from $1.38 per unit ($5.52 annualized) for the first quarter of 2014.
Chairman and CEO Richard D. Kinder said, "KMP had a strong second quarter and increased the distribution for the 52nd time since current management took over in February of 1997. Our five business segments produced $1.478 billion in segment earnings before DD&A and certain items, an 11 percent increase over the second quarter of 2013. Growth was led by outstanding results at Tennessee Gas Pipeline (NYSE:TGP), contributions from the Copano Energy acquisition, increased oil production at SACROC, and strong results from both our Products Pipelines and Terminals businesses. In our Natural Gas Pipelines segment, since Dec. 1, 2013, KMP has entered into new long-term, firm transport capacity commitments totaling 3.1 billion cubic feet per day (Bcf/d). Further, we have another approximately 1.7 Bcf/d of pending transactions, the majority of which are related to third-party LNG facilities, all of which are credible LNG export projects. These LNG commitments, combined with an additional approximately 300 million cubic feet per day (Mmcf/d) of other pending contracts, would bring the total long-term firm transport capacity signed up across KMP's gas pipelines to approximately 4.8 Bcf/d since the beginning of December (approximately 6.5 percent of the current daily natural gas demand in the United States). We continue to see exceptional growth opportunities across all of our business segments. Since our April earnings release, we have increased our project backlog of expansion and joint venture investments at KMP to $15.4 billion from $14.9 billion. These are projects that have a high certainty of completion and will drive future growth at the company. The approximately $500 million net increase in the backlog includes $1.2 billion of new projects and approximately $700 million of projects that were placed in service and removed from the backlog."
KMP reported second quarter distributable cash flow before certain items of $561 million, up 11 percent from $505 million for the comparable period in 2013. Distributable cash flow per unit before certain items was $1.23 compared to $1.22 for the second quarter last year. Second quarter net income before certain items was $698 million compared to $627 million for the same period in 2013. Net income was $669 million compared to $1.01 billion for the second quarter last year, reflecting a large gain from certain items in the second quarter last year primarily related to re-measurement of KMP's original 50 percent interest in the Eagle Ford Gathering joint venture to fair market value as a result of the Copano acquisition. Certain items for the second quarter totaled a net loss of $29 million versus a net gain of $383 million for the same period last year.
For the first six months of the year, KMP reported distributable cash flow before certain items of $1.254 billion, up from $1.055 billion for the comparable period in 2013. Distributable cash flow per unit before certain items was $2.77 compared to $2.67 for the same period last year. Net income before certain items was $1.486 billion compared to $1.282 billion for the first two quarters of 2013. Net income was $1.423 billion compared to $1.802 billion for the same period last year. Certain items for the first six months of the year totaled a net loss of $63 million versus a net gain of $520 million for the same period last year, again, reflecting the fair market value adjustment noted above
After stopping day trading, I concluded that I needed to construct a solid dividend portfolio. I wanted to own companies that had increased their dividends consistently for long periods of time, a decade or longer. Once KMP met that criteria (they have been increasing dividends since 1997), I then used my common sense to determine if the company had a business model that would last or served a purpose that was unique. Did they have a moat?
I loved the idea that they were a giant toll road. According to their web site: "In most of our businesses we operate like a giant toll road and receive a fee for our services, generally avoiding commodity price risk." They are the fourth largest energy company in North America. The largest oil companies in the world rely on Kinder Morgan in order to meet their bottom line. Every time they use Kinder's pipes, Kinder gets paid. This business made sense to me. I want to own a company that makes its money from BIG OIL and has very minimal commodity price risk.
In business, I look for economic castles protected by unbreachable 'moats'." -Warren Buffett
Why I sold all my KMP and switched to KMR:
I decided that KMR is the best Kinder Morgan entity to own for my personal situation. I came to this conclusion after reading Philip Trinder's article in 7/2012: The 2 Most Tax Efficient Investments In The MLP Space
After reading his article I sold all my KMP and bought KMR. At the time I held KMP (also non-taxable) in my retirement accounts and received a K-1. Learning that KMR did not issue a K-1 was one factor which influenced me to sell KMP; however, the major factor for me was that the dividend shares paid by KMR generated a higher effective yield than KMP. KMR trades at a discount to KMP and as long as that persists KMR's share dividends/distributions will have a higher effective yield then KMP's dividend.
My sizable past carry forward losses (from trading internet stocks in 1998-2000 and other trading) will offset any capital gains from KMR. Therefore, my taxable account is a non-taxable account until my past carry forward losses are used up at which point I would of course owe capital gains tax on any subsequent gains.
If you have past carry forward losses, you might want to consider buying KMR in your taxable account. You will not pay any taxes on the share dividends/distributions. If you sell KMR, and there are capital gains, your past carry forward losses will offset them until they are used up.
I am not suggesting that you only own KMR in your taxable account as I do. My strategy is not for most people. However, owning an amount you are comfortable with may be a good investment for you. This is entirely your choice.
Some investors prefer to own KMP rather than KMR because they like to receive their dividends in cash.
I use common sense to pick my stocks.
My last article discloses all my positions in my retirement portfolio.
Disclosure: The author is long KMR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.