Scott Anderson

Special situations, oil & gas
Scott Anderson
Special situations, oil & gas
Contributor since: 2012
First, I do not believe there would be any tax benefit from a goodwill write off...for the tax books, goodwill is amortized. I think it is a time bomb because when/if they need to write off $1B...$10B, or $25B... it surely will not be good news that pushes the stock up. Based on my analysis...the probability of a goodwill write down is increasing by the day. The point of the article was to make investors in KMI aware of this risk. If you think it's a big nothing then by all means go long...I just hope you didn't buy in yesterday because it looks like they are down another 8% .
There would not be a cash cost...this is merely an accounting the end of the day the value of the goodwill asset would be reduced by the amount of the impairment, and it would ultimately flow through to the other side of the balance sheet reducing owners equity.
That can be a bit hard to comprehend, so to simplify it, imagine that the entire El Paso acquisition had been a cash deal for $37B. The cash would have went out the door when the transaction closed. So if 4 years later, we come back and write down the value of those assets, there isn't another cash is just an accounting entry recognizing the facts on the ground...
Now, The El Paso Acquisition wasn't a cash only deal, it was funded by roughly doubling the number of KMI shares outstanding, as well as issuing new debt and assuming El Paso's existing debts. However, the concept is more or less the same.
As to why it would this point even though it is not a cash entry, any material write off of goodwill would be more bad news, and for a company that is losing stock price at a rate of ~50% a quarter, they simply can't afford any more bad news. As I noted, I suspect some of this risk is already priced in.
Good question Metal27. This is one of the things I had in mind when I mentioned a "downward spiral". The 2014 10k does mention some debt covenants...specifically:
"Our credit facility included the following restrictive covenants as of December 31, 2014:
• total debt divided by earnings before interest, income taxes, depreciation and amortization may not exceed:
• 6.50: 1.00, for the period ended on or prior to December 31, 2017; or
• 6.25: 1.00, for the period ended after December 31, 2017 and on or prior to December 31, 2018; or
• 6.00: 1.00, for the period ended after December 31, 2018;
• certain limitations on indebtedness, including payments and amendments;
• certain limitations on entering into mergers, consolidations, sales of assets and investments;
• limitations on granting liens; and
• prohibitions on making any dividend to shareholders if an event of default exists or would exist upon making such
So this covenant revolves around debt divided by EBITDA. I would guess that a Goodwill write off would be excluded even though it's not clearly in the "Amortization" bucket in my opinion. This would probably depend on the wording of the contract, which obviously I do not have. If it was not excluded, a goodwill write off could definitely put them above the ratio's above and turn into a bigger problem.
Other problem areas for Kinder Morgan could be their interest rate swap agreements which I again admit I do not fully understand (Does anyone?). Apparently they issue fixed term debt and then enter into swaps to effectively convert it to variable rates. Reading the notes, it sounds like this has saved them a lot of money in the past. Good for them...I'm sure such a strategy works fine in a falling interest rate environment for entities with excellent credit. My questions would be does this backfire on them going forward, and how does that work with their counter-parties ?
Yes....Or....maybe Detroit. Promises have been made that can not be mathematically kept. Thus...promises will be broken. The only question left is timing. On, and off balance sheet debt will ultimately be defaulted on, and when it is, it is likely to be the single most important financial event in our lifetimes.
All... Sorry about the formatting with no paragraphs. I tried to fix twice, but soon gave up. It looks better at :)
W&O...the math is so simple and obvious, and yet here we are..nothing but crickets :)
I have never understood the allure of defined benefit pensions...public or private. Rather than giving me control and true ownership of what over a career is a substantial amount of money, you trust either government bureaucrats and politicians to take good care of your money for half a century, or you trust your company. Why? How? There are only a handful of people on this earth I would personally trust with such a responsibility, and I can guarantee none of them are politicians or CEO's of fortune 500 companies. I guess to me, the primary purpose of these plans is usually to screw over employees. Governments get a steady stream of income to spend on other projects, at least for a while. Companies get to push cost off onto future CEO's, and if the employee decides to leave before they retire, there is a good chance they get nothing, so it gives the company a lot of leverage. No Thanks!!. I'll take my measily 5% 401k match over that promise waiting to be broken any day.
Thanks Tony!! Whether we need a surgeon or a butcher, we will get neither. Maybe a beauty queen :) ? Nahh...
Yes, but the economy has become addicted to the additional spending now. That $1T annual deficit is directly supporting ~20M $50k per year jobs....and that's not even looking at secondary and tertiary effects as the money sloshes around the economy. People chose careers, chose where to live, made investments, and countless other decisions...based on demand that cannot and will not be sustained. Weaning the economy without killing it would take a very skilled surgeon....Not sure that analogy actually works, but I think you get my point.
There are solutions, but they involve much short term pain, and thus will never be enacted. My goal with this article, in fact with most of my writing isn't necessarily to say what should happen, but rather to project what actually will happen.
We just witnessed an epic battle in congress just to raise taxes on 2% of the population by a mere $60B per year, and that's probably an overestimate. Can you imagine raising taxes by $500B per year(or $5T over 10 years if you prefer) and cutting spending by another $500B? It could never happen because even if the long term benefit was worth the short term pain (and it would be painful), the voters simply wouldn't have it.
Though generally ignored, cash is an integral piece of the monthly debt/deficit equation
You might be interested to know that the cash in hand averaged $215B in 2009 after peaking out at $715B on 10/23/2008.
For 2012, the average cash balance has been $64.5B.
In February of 2012, due to refunds ect, the daily burn rate was about $12B... There are huge monthly swings in cash inflows and outflows, so the cushion you need varies throughout the year. January is generally a light month, running "only"a $52B cash deficit in 2012...2013 will probably be even lower, so cash demands over the next 30 days will be light coming into tax refund season that starts in Feb...or at least should start in Feb...I guess we'll have to wait and see.
On model, and what I cover at uses daily data from the Daily Treasury Statement to project upcoming cash inflows and outflows. This works fairly well most of the time, but if tax refunds are delayed this year, it's going to nuke my model for at least a few months pushing billions of dollars, possibly $100B+ back a few months, stretching out the "debt limit cushion". This doesn't exactly present the best set of incentives...miss your deadline and you delay tax refunds for millions of families, but it gives you more time for your political battles. Oopsy!!
On the politics, I try to be an agnostic observer using the data we have to predict not what should happen, but what will happen. The point of this article was that Treasuries announcement about hitting the limit next Monday is pure political theater and is a completely voluntary act. The only thing I'm surprised about is that it took so long to do it, but I guess they had to wait until the news cycle was right. If It was me in charge, I would have done it months ago to force the issue. Whatever happens, this is getting more interesting by the day
Thanks for the link. We should be seeing some pretty heavy cash inflows for the remainder of the month that I expect to push the debt limit constraints into mid Jan/early Feb. I don't know enough to accurately model extraordinary measures, but I can see that it is ongoing since intragovernmental debt is "magically" shrinking and being replaced with public debt. If it were me in charge, I would just get it done with and issue debt up to the debt limit tomorrow, while beefing up cash. It really doesn't affect the true day of reckoning at all, but it forces the issue.
Well, I wouldn't call any of it good news, though admitting the facts at hand is certainly a good first step. So as soon as both poltical parties issue statements admitting they have collectively stolen $4.8T over the last 30 years or so, then we can start thinking about the possibility of a feasible go foreword plan. I'm not holding my breath. As the "social security trust fund" is drawn down, we will be forced to issue "real" debt in its place. Through 11.5 months, Intragovernmental debt has increased a mere $15B in 2012 vs $1.131T of external debt, indicating that we are pretty much there.
The problem is, who will buy an additional $10T of debt over the next decade? That's over $30k of additional debt per man woman and child. How many families of 4 do you know that plan on buying $120k of treasuries over the next decade? The Fed? In the long run, I don't know that it really matters, as I am quite sure on and off balance sheet liabilities will be defaulted on if not outright, then by being inflated away.
I can believe it and can pretty much guarantee that they will continue to get elected. This is one of the main reasons I have come to the conclusion that regardless of how much time is left on the clock, the game is pretty much over.
You may be right in saying that solutions that would fix the problem exist. My belief is that the likelihood of them being enacted are slim to none. For better or worse, we live in a democracy, and I see no indication that voters from either side of the aisle are even close to being willing to accept any combination of spending cuts or tax increases that even get in the ballpark of fixing anything. Today, we are talking about $16T...there is a very high probability that 4 years from now we'll be talking about $20T. I hope I'm wrong, but the ending to this story is pretty close to being written in stone.
I'm not sure we actually disagree on anything. If it wasn't clear, the point of my article was not intended to be..."you can't owe yourself money, so we are now $4.8T better off". If anything, my larger thesis, covered in prior posts and posts to come will be that we are too far gone to save. The math on this is pretty simple and crystal clear, as you touch on above.
What about my article are you claiming is false? It's pretty basic algebra. If the debt limit is not raised, tax refunds, and a lot of other things will not be paid. No amount of revenue increases or cost cutting between now and February is going to get the government enough cash to process $200B of refunds on top of another $200B in deficits we will probably run between February and March. The debt limit must be raised, and honestly, it probably will be.
Now, we can argue all day about how we got to this point, who is to blame,and what the right path foreword is...check out my blog or other SA articles for that discussion. This article is about some pretty simple math, and I stand by my calculations.
Even the federal govenment's books must balance. As of yesterday, the federal government had $38B cash in hand and the ability to borrow an additional $57B. These are not "highly unlikely numbers", they are cold hard facts. I used 2011/2012 actual daily reciepts and outlays from the Daily Treasury Statement to forecast the upcoming outflows. Will it be perfect? No. But it will be pretty darn close.If they can't borrow, there will be no cash to send out. That is a problem in itself, but that's just how it is.
I think that would be a start, but I don't really see it happening. Do you? Supposedly going over the fiscal cliff gets the government another $400B in revenue and cuts spending by about $100B, which all else equal might get you down to $500B-$600B deficit for 2013. The doomsayers warn that this would crush the "recovery", reduce revenue, increase unemployment ect... In effect you would just cause a lot of chaos for little net improvement in the deficit. I don't know, but it would make an interesting experiment in any case. Whatever happens, I'll be following it on my blog.
On "Other" First realize that the source for these numbers is the Daily Treasury Statement, essentially a daily cash flow statement for the federal government. On the DTS, there are permanent spending categories reported daily, and a handful of categories reported periodically....these are rolled up in "Other" . An example of "Other" would be Social security benefits paid by check as opposed to ETF. It's probably less than 5%, but it does add up. Another is Military active duty pay, which usually, but not always pops up every two weeks with a run rate of about $7B per month. So bottom line, while this isn't the perfect data set, I honestly think it's the best reflection of reality available because it is cash based and reported in almost real time, which minimizes the chances of any government accounting funny business.
To are absolutely correct...I really should have put some air quotes around "services"