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Anthony Grossi
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I am a full-time investor. I learned finance the old-fashioned way, out of necessity, during a career in the film and entertainment industry. I prefer to focus on long-term macro economic trends and demographics. Having identified an invest theme, I look for companies that most nearly fit my... More
  • Kinder Morgan Inc IPO first step in getting rid of KMR 18 comments
    Feb 3, 2011 3:22 AM | about stocks: KMI, KMP, KMR

    KMI's decision to go public isn't about private equity cashing out.  The new corporate structure is designed to elimate the KMR discount and end the distribution incentive to the GP.

    So how does this all work exactly?  Hopefully I can explain...

    The parent company Kinder Morgan Inc. controls KMP, that in turn, owns pipelines. Another company, Kinder Morgan Management, is a publicly traded limited partner in KMP.

    Kinder Morgan Management, or KMR, was designed to attract institutions. Rather than collecting cash distributions from KMP, it receives dividends in the form of "i-units," a special class of stock based on the value of KMP's cash payouts to other investors. KMR then pays its own shareholders dividends in additional stock rather than cash.

    The problem: KMR's stock trades at a discount of about 10 percent to KMP.

    In other words, every quarter, KMP issues additional shares to KMR, which are, in effect, instantly worth 10 percent less.

    So basically the new KMI will allow institutional investors to take advantage of the corporate structure without the drag on capital.

    So what do you get when you buy shares of KMI?  How do I price the IPO?

    • the general partner interest, which entitles it to receive incentive distributions;
    • 21.7 million of the 222.4 million outstanding KMP units, representing a 6.9% limited partner interest;
    • 12.9 million of the Partnership’s 90.3 million outstanding i-units, representing a 4.1% limited partner interest, through its ownership of 12.9 million KMR shares (i-units are a class of the partnership’s limited partner interests that receive distributions in the form of additional i-units instead of cash;
    • it also owns a 20% equity interest in NGPL PipeCo LLC, the owner of Natural Gas Pipeline Company of America and certain affiliates, collectively referred to in this prospectus as “NGPL.” NGPL is a major interstate natural gas pipeline and storage system that it operates.

    Whatever those shares of KMP and KMR plus the stake in NGPL adds up to on a mark to market basis, thats what KMI is worth.  Please keep in mind that the publicly traded shares of KMI only represent approximately 6% of the company.  We won''t know for sure until the terms of the deal become public.

    Hinds Howard, who is also a Seeking Alpha contributor (you should read his stuff if you're interested), has written fairly extensively about KMP and the KMI IPO.  One of his major concerns is that Kinder Morgan probably won't grow more than about 4 percent annually from now own. But thats why they have incentive to get rid of KMR.

    So what should we take away from this as investors...

    Kinder Morgan is basically telling us flat out that the KMI IPO is a first step in the inevitable buyout of KMR.  They will be prudent and take their time to make sure they are paying a fair price (Richard Kinder is basically a genius), but the underlying strength of KMR plus the assumed takeout premium makes buying KMR on the back of KMI one of the lowest risk arbitrage plays available today.

     

    Stocks: KMI, KMP, KMR
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Comments (18)
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  • HaroldL
    , contributor
    Comments (333) | Send Message
     
    Its not clear to me why the 10% KMR discount will go away. And for who? KMI will be subject to corporate income tax, nad the dividends which KMI pays will be taxable to the shareholders. No great advantages immediately jump out at me.
    5 Feb 2011, 02:07 PM Reply Like
  • Anthony Grossi
    , contributor
    Comments (204) | Send Message
     
    Author’s reply » its a drag on KMP's distributable cash flow. it seems like a small amount but basically the company's incentive distributions shift an increasing share of these returns to the general partner at the expense of the limited partner. whether the new corporate structure allows that to immediately reflect in the share price is of course questionable but it will immediately reflect in the balance sheet. Its exactly the same scenario as when EPD bought out its GP last year. Its just a way of getting rid of the distribution incentive.
    6 Feb 2011, 02:08 AM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    >its a drag on KMP's distributable cash flow.<

     

    How is KMR a drag on KMP's distributable cash flow. They pay KMR the same dividend per share that they pay KMP. The only difference is KMR shareholders plow it back into the company to pay for drop downs, extensions, expansions and new lines etc., whereas KMP shareholders do not.
    11 Dec 2012, 03:00 AM Reply Like
  • HaroldL
    , contributor
    Comments (333) | Send Message
     
    Natural gas pipeline investor
    5 Feb 2011, 02:08 PM Reply Like
  • Chip Oat
    , contributor
    Comments (65) | Send Message
     
    I don't see the inevitability of KMR going away, if for no other reason than 1) KMR traded at a discount to KMP back when KMI was pre-LBO public so what's so new now?; 2) the KMR yield is much higher than either the "old" or the "new" KMI and is supposed to be an institution-friendly KMP "yield-alike". KMI never was, and isn't now, a "no K-1" substitute for KMP; 3) KMI could have bought in KMR as a private company if they were so inclined as the LBO raised no new capital for anybody.
    13 Feb 2011, 11:22 AM Reply Like
  • dundav
    , contributor
    Comment (1) | Send Message
     
    I own KMR. After reading this will disc go away under this strategy or will the LBO simply offer the kmr investor the discount as a premium or the equivalent in KMI shares.
    3 Mar 2011, 01:52 PM Reply Like
  • Anthony Grossi
    , contributor
    Comments (204) | Send Message
     
    Author’s reply » my prediction, for what its worth, is that KMP will follow the same strategy set forward by EPD when it bought out EPE and that you will receive KMI shares that represent a premium in stock price but a discount in expected future distribution growth rates. The companies that are buying back their GP's are looking at these like 30 year bonds, sure they're paying a lot up front but the distribution incentives cost more over a long enough time horizon.
    4 Mar 2011, 01:33 AM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    I don't see why anyone owning KMR would want KMI. But if they wanted to get rid of KMR to address the premium. All they have to do is offer KMR shares in KMP instead. A direct switch.

     

    KMR shareholders could sell out at the KMP price with no discount. The same way closed-end funds lose the discount when they are absorbed by a mutual fund.

     

    If shareholders switched to KMP, they would lose the tax deferment of KMR and subject themselves to complicated reporting liabilities.

     

    But they would be shooting themselves in the foot if they did. KMR is how KMP retains earnings and issues new capital stock. KMP is becoming self-funding because of the genius of kmr.

     

    http://bit.ly/RIM0UU
    11 Dec 2012, 03:00 AM Reply Like
  • willbabin
    , contributor
    Comment (1) | Send Message
     
    Way over valued stock...period.
    14 May 2011, 05:16 PM Reply Like
  • Chamois16
    , contributor
    Comments (114) | Send Message
     
    "n other words, every quarter, KMP issues additional shares to KMR, which are, in effect, instantly worth 10 percent less."

     

    I don't see that math. The ishares have the same quarterly value as the cash dividend ($1.15 this time), and new shares issued to KMR shareholders are determined by dividing that number by the value of cheaper KMR shares, thus increasing the amount of stock issued each quarter to KMR shareholders.

     

    If KMR were not at a discount to KMP, the KMR shareholders would receive a lower yield on their investment.
    21 Aug 2011, 09:28 AM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    >every quarter, KMP issues additional shares to KMR, which are, in effect, instantly worth 10 percent less.<

     

    When KMP pays distributions to KMP shareholders they take the funds out of the company. By selling shares to KMR shareholders at the market price KMP is giving shareholders an incentive to reinvest.
    11 Dec 2012, 03:32 AM Reply Like
  • roy schick
    , contributor
    Comments (30) | Send Message
     
    In the lengthy report entitled "Kinder (corporate logo) Morgan" author Park Shiper, it appears to me that Rich Kinder is buying lots of KMI. Good enough for me, I have sold half of our KMR to buy KMI. We lose some dividend, but I anticipate lots of growth. We've been in this investment since the days of Santa Fe Pacific Pipe. Thank you King Richard.
    14 Sep 2012, 06:33 AM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    The last time I see Kinder purchasing KMI was 92 weeks ago.
    11 Dec 2012, 03:00 AM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    >incentive to get rid of KMR.<

     

    How did that work out?
    10 Dec 2012, 10:44 PM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    In the past 5 1/2 years only one company insider, has sold any KMR shares. His most recent transaction was to purchase a thousand shares last month for $69.90 a share. Two days before, “first step in getting rid of KMR,” instablog went up, the SEC reported Richard Kinder bought 15,000 shares for $ 971,258.00. In the ensuing 96 weeks, company insiders bought 68,500 more shares of KMR, with a total value of $ 4,639,087.00 of their own spendable cash.

     

    KMR 101: http://bit.ly/TR5uIt
    11 Dec 2012, 03:00 AM Reply Like
  • AlbyVA
    , contributor
    Comments (774) | Send Message
     
    Today the spread between KMR/KMP is less than 1%.
    23 Jul 2013, 02:24 PM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    What exactly is the significance of this if you were never going to consider KMP anyway?
    23 Jul 2013, 09:17 PM Reply Like
  • Sumflow
    , contributor
    Comments (3597) | Send Message
     
    KMP and KMR are securities that both trade on the NYSE and are designed to have equivalent payouts, although KMP pays in cash and KMR pays in stock.

     

    It cannot be the often speculated reason that income-oriented investors prefer KMP, because they could just as well periodically sell KMR shares to raise cash. This would not only have potential tax benefits, it would allow them to match their cash receipts to their needs for income rather than being locked into the distribution schedule of KMP.

     

    KMR shareholders do not have to pay tax until they sell their shares, thereby avoiding current tax on the payout and being able to take advantage of the tax-timing option.

     

    In a perfect market, the two securities should trade at the same price. If anything KMR should sell at a premium. The KMP premium is a significant and continuing example of market inefficiency.

     

    Discount: http://bit.ly/1bNhyqv
    24 Jul 2013, 11:31 AM Reply Like
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