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Philip Trinder  

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  • Recent Buy: Energy Transfer Partners [View article]
    Ray,

    It's not THAT complex, look at this simple org chart: http://1.usa.gov/1KahNKL

    I kid, I kid, any time your "basic" organizational chart includes five* different publicly traded entities that counts as complex. ;-)

    Brendan,

    You may seriously want to look at also owning ETE as well as ETP since ETE owns the Incentive Distribution Rights for ETP.

    Best Regards,
    Phil

    *Pre-RGP transaction
    Apr 23, 2015. 05:45 PM | 1 Like Like |Link to Comment
  • Capital Product Partners LP: A Dividend Investor's Dream (>10% Yield) At A Deep Value Price [View article]
    Darren,

    I actually had an assumed growth rate of 2.5% per annum so if they step-up the distribution by $0.002 each quarter going forwards that would be ~3.4% growth after the fourth increase (slightly ahead of my estimates). Guess, we'll see how the market in aggregate thinks about it tomorrow (and also when they announce the next distribution to see if up $0.002 is the new pattern).
    After 17 quarters of not increasing the distribution, I view starting to increase it again as positive signaling.
    Emily,
    Have you had a chance to revisit your model?
    Best Regards,
    Phil
    Apr 23, 2015. 05:32 PM | Likes Like |Link to Comment
  • Capital Product Partners LP: A Dividend Investor's Dream (>10% Yield) At A Deep Value Price [View article]
    CPLP increases distribution 0.9% from $0.2325 to $0.2345.

    http://yhoo.it/1K9ZQfi
    Apr 23, 2015. 04:15 PM | Likes Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    UP,

    Yes, that would be where I would start with my tax advisers, that is of course a slight oversimplification due to all of the other items that flow through the K-1s each year (which is why EVERYONE who buys any K-1 investment needs to keep EVERY SINGLE K-1 they ever receive).

    So assuming that is the best case corrected outcome, your possible tax savings would be:

    OLD ESTIMATE
    $175,000 * 39.6% = $69,300
    $175,000 * 23.8% = $41,650
    Total Tax = $110,950

    BEST CASE ESTIMATE
    $175,000 - $104,078 =
    $70,922 (Reduction in Recapture Tax Calculation)

    $104,078 * 39.6% = $41,215
    $195,922 * 23.8% = $46,629
    Total Tax = $87,844 (so a ~$23,106 or ~20.8% reduction in your KMP specific tax bill, better than a sharp stick in the eye!)

    You may have a problem though with an informed professional tax adviser because their first question will be "can we have a copy of every K-1 you ever received from KMP?" But you may want to try and get a verification of that concept from your CPA friend (or maybe someone who is actually focused on MLP investments) and then perhaps consider amending your 2014 tax return yourself. I am not sure how to do the entries correctly in TurboTax, which was another reason I caved in and hired a pro team after fully exiting some MLP positions and becoming concerned with how TurboTax handled them. You could also pay extra for TurboTax Audit Protection and then get on the phone with TurboTax to try and see if they could help (Alan Turing's job may have been easier than getting a straight answer from TurboTax though).

    After your Adjusted Basis hits zero, then you pay LTCG tax rates on the allocated income each year in your K-1 (this number is different than the gross amount of distributions received).

    Again let me caveat everything in my comment with the standard: I'm not a tax expert, that is just my rough understanding, don't ever believe anything you read on Seeking Alpha, always do your own due diligence, which will sometimes mean you have to pay someone for their professional expertise, never ever believe that Trinder guy unless he can post a link to some public filing or publicly available third party expert source supporting his statements.

    I don't have first hand experience with a zero adjusted basis position yet.

    Also for the rest of you who might be thinking to yourselves, "hmmm, interesting and that tax bill really sucks but I'll avoid that problem by only holding K-1 investments in my tax advantaged accounts." (IRA, Roth, etc., etc.) Guess what the first question was for me when I had my first meeting with my tax team?

    "Do you have any K-1 investments in any tax advantaged accounts?"

    That was the first question on their due diligence list. Why?

    The whole pesky Recapture issue when you exit a K-1 investment position in any tax advantaged accounts. In Uncle Pie's case if he held KMP in an IRA the $104,078 (or the $175,000) of Recapture generates UBTI because it is held in an IRA.

    Oops.

    Both of those numbers are way, way, way over the $1,000 threshold so all of a sudden $103,078 (or $174,000) will be viewed as taxable and the tax payment should correctly be sent out of your IRA to pay Uncle Sam. Your IRA custodian may mess that up though but the tax burden will still fall back on you if you get an IRS audit (and the IRS person understands MLPs correctly).

    UBTI Tax Rates: http://bit.ly/1rKwI4p

    I'm not sure if those UBTI tax rates are current but it will never matter to me because I will never hold any K-1 investment in my IRA. But OUCH! Although I guess the overall taxes likely end up being less than they would be in a taxable account.

    Some of you may now be thinking, "hmmm, well I'll never sell I'll just die first instead and I won't have that problem." Not exactly (other than you'll be dead when the problems show up), the day you die (and technically exit your ownership position in the partnership) that "step-up" that occurs will also trigger the same Recapture and UBTI issue if the K-1 investment is held in an IRA and your heirs correctly contact the MLP to reset their Adjusted Basis (even though it is held in an IRA). If the K-1 investment is held in a taxable account then the step-up in Adjusted Basis can occur and your heirs will sneak past the dreaded tax man.

    When in doubt: http://bit.ly/1J8ElOd

    It does seem like the IRS may not bother with small MLP investments in IRAs but it is a risk. Just always make sure you have a well thought out plan and make sure you try and think through various possible contingencies, like the old adage goes "Failing to Plan is Planning to Fail."

    Best Regards,
    Phil
    Apr 21, 2015. 09:01 PM | 2 Likes Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    UP,

    If you look closely at how the calculation works for the line item called "Depreciation recapture-taxed at ordinary income rates," technically the ordinary income taxes are due based on "recapturing" the depreciation that was allocated over the life of the investment period as part of the reduction to get to Adjusted Basis (and yes the example is oversimplified). The maximum amount of depreciation that can be allocated is likely to end up being equal to the total Original Cost Basis, which in turn means that the maximum amount of Recapture subject to being taxed at Ordinary Income Tax rates may also end up being equal to the Original Cost Basis (which is why I asked if you originally paid $50 per unit for KMP). But again it is best to use professional help that has the necessary expertise in MLPs and I guess it all depends on how much brain damage you want to put yourself through thanks to the complexities of the tax code...

    Best Regards,
    Phil
    Apr 20, 2015. 11:17 PM | 1 Like Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    Uncle Pie,

    I'm not a tax expert either but have been focused in MLPs since the mid 90s. Your original cost basis is absolutely relevant to the amount of Recapture / Ordinary Income Taxes you pay when you fully liquidate a partnership / K-1 investment.

    See Basic Tax Principles here (which is also why I have saved every single K-1 I have ever received): http://bit.ly/rt8BNK

    I too used TurboTax for many years, but as my MLP holdings continued to expand I became more and more uncomfortable at tax time and the stress just became untenable for me (even with paying TurboTax extra for "IRS audit protection"). Additionally, once a few States started to notify me that I needed to file a state tax return in their States I caved in and hired professional help. Professional help is expensive but worth it for me (essentially a First World Problem).

    Best Regards,
    Phil
    Apr 20, 2015. 05:04 PM | 1 Like Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    Uncle Pie,

    The "C-Corp General Partner buys its underlying Limited Partners tax bomb risk" does exist for your EEP position because hypothetically its General Partner and IDR owner Enbridge, Inc. (ENB) could one day decide to do exactly the same trade as Kinder. EEP did not reduce its IDRs unilaterally, it actually paid 66.1 million Class D units (~$2.4 billion) to lower its maximum IDR tier from 50% to 25%. See page 149 of EEP 10-K: http://1.usa.gov/1GdhGzw

    The GP consolidation risk does seem less likely for EEP since the maximum IDR tier is now 25% but it is still technically possible. One way to hedge against that possible tax risk is to hold share of EEQ (which parallels the old KMR shares) in place of some of the EEP units; however EEQ pays its dividend in the form of more shares (so no cash payments to live off).

    On the other hand that specific consolidation risk does not and never will exist for EPD. EPD did not eliminate their IDRs unilaterally, EPD actually paid ~$8 billion to purchase its publicly traded GP. Back in 2010 EPD bought in its General Partner by issuing 1.5 EPD units in exchange for each publicly traded GP unit (Enterprise Holdings GP, LP).

    News Story: http://on.wsj.com/1GdhGPO

    Additionally, since the EPD unit exchange was a partnership tax structure buying a partnership tax structure it did not cause any taxes to be due at closing for the owners of the GP. The "tax bomb" you experienced is because a C-Corp tax entity purchased a partnership tax entity. If any MLP in existence ever gets purchased by any C-Corp this exact same taxable event will happen to the partnership unit holders.

    In your additional data about your KMP position you state that you had 3,500 units and $175,000 was considered "ordinary income," was your original cost basis in the 3,500 units roughly equal to $175,000? Typically the "recapture taxes" would be the difference between your zero adjusted tax basis and your original costs basis. So based on your comment it would seem that you purchased the 3,500 units at an average price of $50, which seems higher than where KMP was trading during the period when I think you purchased your KMP units. If your original cost basis is substantially lower than $50 per unit that may actually lower the calculation of your tax bill because it should shift more of the final proceeds into the "Long Term Capital Gain" bucket instead of the "Recapture / Ordinary Income" bucket.

    Even though hiring professional tax help with specific expertise in MLPs is expensive, it may be worth it to have them redo your 2014 taxes given the massive tax bill you just paid (although anyone you hire will immediately ask for every single K-1 you have ever received for KMP so they can roll forward your tax basis correctly from inception). My concern is that TurboTax is not quite capable of handling all the nuances of the KMI / KMP transaction.

    Best Regards,
    Phil
    Apr 20, 2015. 01:31 PM | 3 Likes Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    Uncle Pie,

    You make this statement:

    "There was NO opinion given regarding the fairness of the transaction to the holders of Kinder Morgan Energy Partners, KMP."

    Your statement is still incorrect, here is the direct quote from Annex B, page B-4:

    "Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, (a) the KMP Consideration to be paid pursuant to the KMP Merger is fair, from a financial point of view, to the KMP Unit Holders and (b) the KMR Consideration to be paid pursuant to the KMR Merger is fair, from a financial point of view, to the KMR Share Holders."

    There are always multiple investment banking firms providing various roles and services during any large complex transaction.
    The KMR IPO was back in 2001 so you could have managed your exposure to the Kinder Morgan entities at any time after KMR was publicly trading (especially when KMR was trading at a discount to KMP). Perhaps my opinion is not as negative because at the time of the merger I only held exposure at KMR and KMI so I had zero tax impact from the merger because the KMI stock exchanged for KMR stock was a tax-free exchange. However, I did not receive all of the cash distributions from owning KMP for the time period that you held it.

    Best Regards,
    Phil
    Apr 19, 2015. 01:31 PM | 1 Like Like |Link to Comment
  • Rich Kinder: 'The Kinder Morgan Game Plan Is Still On Track' [View article]
    Uncle Pie,

    In your comment you make this statement:

    "he [Mr. Kinder] did not bother to obtain a "fairness" opinion from any investment bankers that the KMP holders were getting a square deal. This is stated plainly in the disclosure documents filed with the SEC."

    Your statement is incorrect, the fairness opinions are clearly disclosed in the SEC filings. You can find the fairness opinions from investment banks here (see Annex B and Annex C): http://1.usa.gov/1GYjNak

    The General Partner of an MLP has control over both the GP and the LP so whenever both GP and LP are publicly traded it makes sense to own both. Whenever their is any M&A activity between any GP and its LP(s) there will always be fairness opinions provided to the Conflicts Committee of the Board of Directors.

    Sorry to hear of your large KMP tax bill, did you ever consider buying KMR instead of KMP?

    Best Regards,
    Phil
    Apr 18, 2015. 12:54 PM | 12 Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    Always dubious,

    Using malevy's inputs the 0% return price is $75.93, also Termination value in my model is always $0.

    malevy,
    Here's a link to the original BP Prudhoe Bay Royalty Trust Agreement: http://1.usa.gov/1DoBig4
    So you can search for language for your hypothetical "someone tries to corner or take private BPT Termination outcomes*" because you're right in the long run were all dead and so is BPT...
    Best Regards,
    Phil
    *Hint: It's a really, really bad / career ending idea for someone to try it
    Apr 16, 2015. 04:08 PM | Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    malevy,

    I continue to think that you are unclear on what "rights" BPT has under the conveyance. Here are a couple of additional points on the "rights" that exist as per the BPT Trust Conveyance. All caps added in the quotes for emphasis.

    From page 46 of the 2014 10-K:

    "There is no precise method of allocating estimates of physical quantities of reserve volumes between BP Alaska and the Trust, since the Royalty Interest is NOT a working interest and the Trust does NOT own and is NOT entitled to receive any specific volume of reserves from the Prudhoe Bay field."

    Source: http://1.usa.gov/1CWwzVa

    So there will never be any Strategic / Energy Industry Buyer for BPT, since it has no rights at all to the underlying reserves.

    Also I have mentioned the following concept multiple times on SA and on Twitter but here is the "production level doesn't matter for Termination concept" taken directly from the Independent Third Party Reservoir Engineering Report that gets filed with every 10-K:

    "7. Production attributable to the BP Prudhoe Bay Royalty Trust will decline with the BP Exploration (Alaska) Inc. production. However, the per barrel Royalty will not have a positive value if the West Texas Intermediate Price is less than the sum of the per barrel Chargeable Costs and per barrel Production Taxes, appropriately adjusted in accordance with the Overriding Royalty Conveyance. Under such circumstances, average daily production attributable to the BP Prudhoe Bay Royalty Trust WILL HAVE NO VALUE and therefore will not contribute to the reserves REGARDLESS of BP Exploration (Alaska) Inc.‘s net production level."

    Source, pages 3-4: http://1.usa.gov/1DMqcD5

    The royalty conveyance document that created BPT is not at all like any other traditional Overriding Royalty Interest ("ORRI"), since a "traditional" ORRI attaches to the underlying reserves within specific wells or fields. The BPT royalty conveyance was designed specifically as a financing instrument and purposely made sure that the "overriding royalty" did not in any way attach to BP's underlying reserves in the Prudhoe Bay Field.

    The calculated Termination Value for BPT will be zero and the investment bank hired at the time will provide that opinion to "check the box" as per the Royalty Conveyance. Hypothetically if BPT units are trading OTC for $0.10 at the time then BP will just have to pay the $0.10 per unit to get rid of it. Although the Trustee may use the last part of the $1 million in cash within BPT to pay to de-list and remove the OTC units, so they will simply disappear.

    So when you say "rights" and "ownership" can you clarify what you mean by those terms?

    Best Regards,
    Phil
    Apr 16, 2015. 02:00 PM | Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    malevy,

    A good current case study on what happens at the termination point of a royalty trust is Whiting USA Trust I (was ticker WHX but is now on trading OTC at WHXT).

    WHX Profile: http://bit.ly/xcTMJp

    Google Finance: http://bit.ly/1CV4x6S

    WHXT is trading around $0.09 per unit so that may be a good rough estimate for what BP might have to payout as the Termination payment just to get rid of it, since it seems like WHXT should already have gone to zero and disappeared.

    How many lawsuits have been filed against Whiting Petroleum Corp (WLL) because of the WHX Termination?

    Given the legal structural components documented in the BPT Trust Conveyance document and the clarity around the escalation in the Adjusted Chargeable Costs, I don't think any securities lawyers will waste any time trying to sue BP when BPT eventually terminates. Try rereading the language that you posted in your comment and think like BP and the securities lawyers who wrote the BPT documents back at formation.

    Why do you think there is some wiggle room in this last sentence?

    "Unit holders DO NOT HAVE THE RIGHT under the Trust Agreement to seek or secure any partition or distribution of the Royalty Interest OR any other asset of the Trust OR any accounting during the term of the Trust OR during any period of liquidation and winding up."

    The third party fairness opinion / valuation provided by an investment bank will show a value of zero under all reasonable WTI oil price deck assumptions. The royalty payment will likely have been zero for ~8 quarters so the projected costs will be substantially above WTI oil prices at that point in time (which is why I already mentioned that BP's friendly investment banker would provide a zero valuation opinion in my earlier comment).

    When the Adjusted Chargeable Costs have increased enough Termination will naturally occur under the terms of the Trust Conveyance and BP will be just fine with it happening.

    Best Regards,
    Phil
    Apr 14, 2015. 10:54 AM | 2 Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    malevy,

    The economics of that trade would never work for BP, so no they will never try and buy in 60% of the trust and cause its termination.

    BP just has to wait for the Adjusted Chargeable Costs to get high enough and then wait 8 quarters for the trust to automatically terminate, then have a friendly investment bank provide a fairness opinion stating that "yes the terminal value is in fact zero because of the automatic increases in the Chargeable Costs and the Cost Adjustment Factor (the inflation adjustment)."

    In fact, given the ongoing increases in total expenses the $1 million of cash at BPT will not be enough money to pay for 2 consecutive years worth of expenses anymore. A million dollars just isn't what it used to be back in 1989. BPT "Trust Administrative Expenses" for 2014 were a total of $1.1 million. One could make the argument that after five quarters of zero Royalty payments to BPT it might run out of money and that may cause a functional termination event (in less than the two year period stipulated in the trust conveyance).

    Best Regards,
    Phil
    Apr 13, 2015. 09:49 PM | Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    malevy,

    Yes, the trust can be terminated with a 60% vote of the unitholders, here's the language from page 4 of the 2014 10-K:

    "Termination of the Trust

    The Trust will terminate if either (a) holders of at least 60% of the outstanding Units vote to terminate the Trust or (b) the net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year (unless the net revenues during the two-year period have been materially and adversely affected by certain extraordinary events)."

    Source: http://1.usa.gov/1CWwzVa

    Why are you now asking about the unitholder vote for termination?

    Are you thinking that BP might try and buy 60% of the units the next time the distribution hits zero and the BPT unit price is below $5 (or possibly lower) and then go ahead and vote to Terminate the trust? Now that would be a sneaky move.

    Best Regards,
    Phil
    Apr 13, 2015. 07:27 PM | Likes Like |Link to Comment
  • 3 Good Reasons To Sell BP Prudhoe Bay Royalty Trust [View article]
    Pablomike,

    Mike's (malevy's) estimate was that production would average 90,000 Bbls/Day for full year 2015. I mentioned above that my model takes into account production seasonality so no it is not 90,000 Bbls/Day for all four quarters but the average of the four quarters is 90,000.

    Best Regards,
    Phil
    Apr 13, 2015. 07:06 PM | Likes Like |Link to Comment
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