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Tom Konrad, CFA  

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  • My Yieldco Raised Its Dividend With This Weird Trick [View article]
    Totally agreed that it's an old trick- what's odd is that few yieldco investors have been talking about it.
    May 28, 2015. 09:44 AM | 1 Like Like |Link to Comment
  • Capstone Infrastructure: How Bad Is The Worst Case? [View article]
    Capstone is one of my "10 Clean Energy Stocks for 2015" (and it was for 2014 as well.) Click over to my past articles and look at the most recent monthly updates on the list to see my current thoughts.... If you scroll down, you'll see that each stock has a paragraph or two every month.

    here is the most recent.

    I'll be writing another this weekend.
    May 27, 2015. 07:16 PM | 2 Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    I don't recall that, but you could be right.

    Does the IRS ever issue "approvals" or does it just fail to disapprove? (Answering my own question, it does issue private letter rulings (PLR) on specific taxpayer questions, but I seriously doubt that NSC wanted to bring this to IRS attention by requesting a PLR.)

    But if such an "approval" occurred, it was before the recent ruling, which is pretty convincing evidence that the debt can not be collected prior to the termination of the lease. All that remains is to determine if the lease will ever end, which is also extremely unlikely given the cost to the lessee, and the lessee's infinite renewal options.

    With $17m in the settlement account, and only $915k in rent payments, the lease is a loan of infinite duration at 5.3% interest with a railroad, oil and gas leases, timber sales, and (at least so far) tax deductions thrown in for free.
    May 23, 2015. 10:23 PM | 1 Like Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    That would be true if the debt had a due date. But this debt is not due until the end of the lease, which can be renewed (at NSC's option) indefinitely. Given the cost of paying off the settlement account and returning the track to PW in the condition defined in the lease, all parties agree that it will never come due. According to the IRS, a debt which will never come due, cannot be collected, and pays no interest is not a debt.
    May 23, 2015. 10:03 PM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    I'm more interested in the IRS's opinion on this.
    May 22, 2015. 10:33 PM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    My source is the filings in the court case... I have not reviewed the tax records.

    With regards to the judges ruling, it confirmed what the GAAP accountants had said all along: the settlement account was uncollectible. But for NSC ot take its tax deduction and PW to get income from non-cash "additional rent" the settlement account has to be a real liability/asset in the eyes of the IRS.

    To be a real asset, PW has to have some prospect of collecting the money owed. Otherwise, PW can write it off, just like a bank writes off a loan when it can't collect the money from the debtor. (incidentally, when a bank writes off a loan, it also reports the amount of the write-off to the IRS as income for the debtor on form 1099-A or 1099-C, depending on the type of loan.

    The court case was PW's attempt to collect the settlement account. PW can't collect, so it can write it off.
    May 22, 2015. 11:05 AM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    I'm not sure if PW could pay less (or nothing) because it has the NOL to shield income, but it probably could. (I actually allude to this possibility in the article, when I guess that the dividend will be resumed at $0.40 despite $0.56 in potential earnings.)

    To decide what it *will* do look at Lesser's holdings- 21% of the common. He wants the stock to go up, and he wants to sell more stock at much higher prices to fund his plans to turn PW into a yieldco. If there is no dividend, the stock price will fall, not increase. You be the judge.
    May 22, 2015. 09:12 AM | 1 Like Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    You may be right that the NOL will give PW the option of not paying dividends for a very long while. That depends on if the rule that REITs must distribute 90% of income references GAAP income, taxable income, or some other definition of income. I'm not sure.

    But assuming that PW will have the option of not paying dividends, I personally don't believe that Lesser will take that option. This is less because of trust and more because it would cause the share price to fall and he (1) owns 21% of the company's common stock and (2) he wants to do secondary offerings at much higher prices to fund his ambition to turn PW into a mini-yieldco. I suspect, as I said in my article (2nd to last para in the "Valuing the Remains" section), that he may use some of the NOL to set the dividend at a lower rate than he might have to if the NOL were not available. $0.40 per share (the previously suspended dividend) is my best guess.

    If I were managing the company and had this sort of flexibility, I would start off with a much lower dividend, say $0.10 annually, and increase it to 15c the next year, then 22c, then 33c, then 50c (50% each year). This strategy would cause an initial hit to the stock price, but after a few quarters of raises, dividend investors would probably be paying well above the odds because many would (irrationally) expect the large annual increases to continue forever. And note that I'd be able to accomplish 4 years of 50% dividend increases while still paying less than an average of 40c a year by simply starting the dividend at a low number.

    This is precisely what seems to be happening with most of the yieldcos. So many investors forget that past performance is not a good predictor of future results, and just draw linear trend lines into the infinite future. That's why they overpay for growth.
    May 21, 2015. 01:59 PM | 1 Like Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    PW has viewed the settlement account as uncollectible for the purposes of GAAP accounting, not for tax accounting. It's the tax accounting treatment which the ruling allows PW to change.
    May 21, 2015. 12:58 PM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    MF & 60+ -
    We're closer, but you both seem to still misunderstand.

    The purpose of "additional rent" in the lease was allow NSC/WLE to take advantage of tax deductions to which PW would normally have been entitled. NSC/WLE did not actually get these deductions, they got a deductible non-cash expense in the form of "additional rent." PW got a taxable non-cash income in the same amount, and offset this noncash income by using the deductions to which it was entitled under tax law. The settlement account represents this accrued noncash income.

    Historically, PW *did* shield income with non-cash depreciation expense- the income that it shielded was the income in the form of non-cash rent which accrued in the settlement account. The settlement account was carried as an asset on PW's tax records, although it was not carried as an asset on PW's GAAP balance sheet because it was deemed to be uncollectible by the firm's accountants.

    A large part of the lawsuit was PW's attempt to collect the settlement account. If PW does not appeal the summary judgement, or if that appeal fails, the court will have said that the settlement account is uncollectible as well. This ruling should be sufficient to write off the settlement account for the purposes of the IRS. That is what will result in the NOL and future dividends being counted as return of capital.

    Because of the ruling, NSC/WLE may also have to reduce their corresponding liabilities in the form of their parts of the settlement account, and take them in the form of non-cash taxable income but, as the judge said, that is between NSC/WLE and the IRS.
    May 21, 2015. 12:55 PM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    See lines 75 & 76 on p.25 of "NS Concise Statement of Material Facts ISO Motion for partial summary judgement" - document 200 from the case. Note that this is a filing by PW's opponents in the case; they have no incentive to misrepresent the tax situation.

    "...with respect to non-cash rent items would be 'wash' entries for federal income tax purposes... depreciation and amortization (D&A) were recorded as income to P&WV on its tax returns, but income for [D&A] was offset dollar for dollar with a corresponding tax deduction."

    The "corresponding tax deduction" is the D&A expense... the effect of "additional rent" in this case is to transfer this income tax deduction from PWV to NSC/WLE , increasing the tax payable by PWV shareholders over what it would have been had not the "additional rent" been accruing to the settlement account.

    If PWV had been able to use its depreciation to shield its income, not all dividends paid to shareholders would have been taxable as income.
    May 20, 2015. 12:09 PM | 1 Like Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    While you are correct that the credits to the settlement account did not result in additional dividends, they changed the nature of those dividends and how they were taxed. If you've owned REITs for any length of time, you will have observed that not all distributions are taxed as income; some are capital gains and some are return of capital. And that all depends on the tax returns filed with the IRS, which NSC was preparing for P&WV until around 20011- do you really think that NSC would have deducted those credits to the settlement account as income on their own tax returns but not credited them on PWV's tax return?

    sixtyplus- I was unable to find your reference on p.23, but there was a shareholder complaint referenced on that page that P&WV was not paying out 90% of its taxable income to shareholders (a requirement for REITs). This was probably prompted by the shareholder being asked to pay taxes on more income than was actually distributed. Someone called Harder then seems to contradict this in a summary of an unquoted text by saying "we have always paid out all our taxable income which is cash rental ... less expenses." I suspect this latter quote is what made you make your statement, but I also suspect that the seeming contradiction is the difference between GAAP income (reported on financial statements) and taxable income (reported to the IRS.) The two are usually different because, as you are aware if you've ever done your own taxes, IRS rules are even crazier than GAAP accounting.
    May 20, 2015. 10:04 AM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    Your premise is not correct... shareholders did pay tax on the amounts credited to the settlement account. Your last two comments are completely at odds with each other in this regard.
    May 19, 2015. 03:37 PM | Likes Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    As far as I can tell, you understand it, except that when I said "they paid the tax" I was referring to "shareholders," not PWV or PW. (When I refer to corporations, I usually say "it" anyway, although I'm not 100% consistent about this.) And the NOL will work the same way- as a benefit to current and future shareholders, who will not have future dividends count as income.
    May 16, 2015. 11:32 AM | 1 Like Like |Link to Comment
  • Power REIT Loses; What Now? [View article]
    I think they want to punish Lesser for rocking the boat; they are unlikely to win anything in the lawsuit since they have admitted the remaining claims don't have any damages associated with them. The only thing Lesser can offer them to not appeal, so a reasonable settlement would be him not appealing and them dropping the claims. He wants to consult with appeals experts before he makes that decision. If he does make that offer, there's no guarantee NSC and WLE will accept it, unless they think he has a chance of winning something. And he won't make the offer if *he* thinks he has a chance of winning something at reasonable cost.
    May 15, 2015. 09:36 AM | 1 Like Like |Link to Comment