Seeking Alpha

Kinder Morgan scrapping MLP structure in $44B deal

  • Consolidating its oil-and-gas pipeline empire into a single company, Kinder Morgan (NYSE:KMI) will purchase Kinder Morgan Energy Partners (NYSE:KMP), Kinder Morgan Management (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB).
  • The MLP structure is limiting, says Richard Kinder. Combining the four companies into one unit "will allow us to further expand the reach of the kind of projects we can do."
  • KMP unitholders will receive 2.1931 KMI shares and $10.77 in cash for each KMP unit, or $89.98, a 12% premium to Friday's close (based on KMI's Friday close).
  • KMR shareholders will receive 2.4849 KMI share for each share of KMR, or $89.75, a 16.5% premium to Friday's close (based on KMI's Friday close).
  • EPB unitholders will receive .9451 KMI shares and $4.65 in cash for each EPB unit, or $38.79, a 15.4% premium to Friday's close (based on KMI's Friday close).
  • In conjunction with the deal, KMI expects a $2 annual dividend in 2015, a 16% boost to 2014's anticipated payout. The dividend is expected to grow about 10% per year through 2020.
  • A conference call is set for Monday morning at 8:30 ET.
  • Press release
Comments (194)
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Wow. Too much to digest and analyze. I hold KMR as well as KMI
    10 Aug, 09:42 PM Reply Like
  • jerrywengler
    , contributor
    Comments (465) | Send Message
     
    I agree, Love__Money, other than to say this certainly sounds like more money for everyone. Long KMP.
    10 Aug, 09:52 PM Reply Like
  • rrs2205rrs
    , contributor
    Comments (128) | Send Message
     
    I own KMI, KMP, and EPB, time to get paid ; )
    10 Aug, 10:00 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    With 2 $ dividend, KMI will spike. KMR and KMP holders are getting a nice premium as well. Richard Kinder is an outstanding CEO of our times. Only losers are those who did not invest in Mr. Kinder's business. I am very happy
    10 Aug, 10:10 PM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2755) | Send Message
     
    Reduced distributions are definitely in the cards. The company says they need the cash to grow.
    10 Aug, 11:43 PM Reply Like
  • odelltrclan
    , contributor
    Comments (13) | Send Message
     
    I am happy about this. I own KMI, KMP, KMR & EPB. Most shares came in the last 6 months. They would not be doing this unless they saw real growth potential in the coming years. Hold onto your shares.
    11 Aug, 12:41 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    The reduced distributions will be felt by current owners of KMP, KMR and EPB based on the shares they will receive in the transaction and the new rate of payout. KMI holders will receive a greater payout.
    11 Aug, 01:45 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    PDR- Yep, but better growth, even KMI (the fastest grower) will bump up to 10% growth.
    11 Aug, 01:45 AM Reply Like
  • Hendershott
    , contributor
    Comments (1543) | Send Message
     
    This should put an end to a lot of controversy. One might expect others, like OKE to do something similar, WMB already is.
    10 Aug, 09:45 PM Reply Like
  • mydogmoe
    , contributor
    Comments (362) | Send Message
     
    I think the same thing. All of these guys have to be pondering the next move. Just look at the chart on TRGP compared to its MLP NGLS. It has no Lp. It has probably tripled in value....
    10 Aug, 10:08 PM Reply Like
  • sensus
    , contributor
    Comments (28) | Send Message
     
    Hendershott: Not correct. Williams Companies (NYSE:WMB) continues to be the general partner of Williams Partners (NYSE:WPZ) and there has been no indication that WMB will merge with WPZ.
    10 Aug, 10:14 PM Reply Like
  • Hendershott
    , contributor
    Comments (1543) | Send Message
     
    Sensus, You're correct, WMB isn't buying WPZ, they are buying ACMP, whose gp they already own.
    11 Aug, 01:14 AM Reply Like
  • 27975573
    , contributor
    Comments (288) | Send Message
     
    Yes others will look at consolidating.....
    However; watch Kinder after the "spin-in" is finished.

     

    The synergies of size and cost reductions will facilitate the buying
    of at least a LNG player if not all of Cheniere.
    Industry consolidation is right around the corner.
    11 Aug, 10:16 AM Reply Like
  • tomlos
    , contributor
    Comments (1117) | Send Message
     
    Long KMI and very confident in management. I'm with Richard Kinder.
    10 Aug, 09:47 PM Reply Like
  • mydogmoe
    , contributor
    Comments (362) | Send Message
     
    I knew something like this had to happen. I figured KMP would be absorbed by 2015. EPB is finally doing what they paid for it to do. KMR surprised me. Anyway expect some interesting action on all MLPs Monday. Over all it had to happen. Didn't think it would be this year. I tip my hat to Kinder.....
    10 Aug, 09:47 PM Reply Like
  • mscottbone
    , contributor
    Comments (54) | Send Message
     
    I have happily been long KMR for about two years. Was just thinking about buying more but will just enjoy the ride now.
    10 Aug, 09:49 PM Reply Like
  • oysters
    , contributor
    Comments (40) | Send Message
     
    I had thought it would be two or three years down the road. Not surprised that it's happening (Rich has often stated his digust with the market price), but with the timing.

     

    Ain't complaining one bit. Own tons of KMP and some KMI. What will Monday morning bring?
    10 Aug, 09:51 PM Reply Like
  • Voice from Chapel Hill
    , contributor
    Comments (82) | Send Message
     
    Interesting from a tax point of view - wonder how transition will happen for KMR and KMP limited partners to stockholders? Will limited partners have to settle with IRS even if they exchange to KMI instead of cash?

     

    I own KMI. I suspect KMI will come under a lot of pricing pressure over next year or two because of exit of lots of limited partners interested in MLP model and not the KMI C corp model...
    10 Aug, 09:52 PM Reply Like
  • sethmcs
    , contributor
    Comments (3228) | Send Message
     
    My guess is the exchange will be a taxable event. Anytime you receive cash automatically is a taxable event. Receiving shares of a C corp for LP units most likely will cause a taxable event as well unless KMI can do some magic I am not aware of. Nevertheless KMI is going on my watch list because of this announcement.
    10 Aug, 10:01 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2546) | Send Message
     
    So if it is a taxable event (I also believe it will be), many of the long term KMP KMR holders likely have a 0 cost basis, and therefore be paying a rather large tax bill. So the question is how many of these investors have to sell the KMI shares to fund the tax bill, and if that creates an opportunity of KMI taking a hit from tax selling after the deal closes. Certainly something to watch.
    10 Aug, 10:24 PM Reply Like
  • deltatov@aol.com
    , contributor
    Comments (21) | Send Message
     
    If it is taxable event it's a deal breaker for me. I'll lose far more in taxes than I'd gain in cash (also taxable as regular income?). This will will be a money losing proposition for me and I'll vote against it if that is the situation.
    10 Aug, 10:27 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    "Ain't gonna be no vote, partner!"
    10 Aug, 10:39 PM Reply Like
  • Rudester
    , contributor
    Comments (2257) | Send Message
     
    @Bearperney,

     

    You are the one that's wrong partner. There will be a vote of all affected stockholders and unit holders in the different companies.

     

    From the official press release: "KMP, KMR and EPB were represented in the negotiations by committees comprised exclusively of the independent members of the boards of the respective entities. The boards of all the Kinder Morgan companies have voted to recommend the transaction to their respective unitholders and shareholders. Each transaction is conditioned on the closing of the other transactions. Following unitholders and shareholder votes and standard regulatory notifications and approvals, the transaction is expected to close by the end of 2014."
    10 Aug, 11:06 PM Reply Like
  • b3player
    , contributor
    Comments (232) | Send Message
     
    Yes, but I seem to remember that certain shr holders of these companies (KMI,KMR KMP) have different, if not zero voting rights. I am sure someone on the SA board who follows these companies more closely than I will weigh in on this (and then again, I might be wrong).
    10 Aug, 11:09 PM Reply Like
  • b3player
    , contributor
    Comments (232) | Send Message
     
    One more point, the reason that Bear made his comment was to reflect R. Kinder's # of voting shrs in each of these companies.
    10 Aug, 11:11 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    yep, Kinder and the big institution money that holds KMI ( most the voters) will be a big ol yes. They get a nice jump in div growth. Will be keeping the KMI shares.

     

    That said, ugly taxes for most of us KMP, EPB holders. KMR, not so much but the 91.72$ is a decent price for KMP,KMR.

     

    Agreed NOT what I would have chosen, as NOT selling and new cost basis for the inheritors was my plan.

     

    WHY I keep diversified, I trust these guys about as far as I can throw em. Was screwed in EPB, by the GP, with EP selling out to KMI and the CEO cashing big money and EPB holders losing the dropdowns, now screwed again- and yes I know the GP has the "right" to do it.
    11 Aug, 02:07 AM Reply Like
  • Scooter-Pop
    , contributor
    Comments (2034) | Send Message
     
    Mike,

     

    Boon for those fortunate to hold this event in a Roth, but the ouch that feels good in a taxable account. Barack is happy with the ouch!
    11 Aug, 04:57 AM Reply Like
  • jperello001
    , contributor
    Comments (19) | Send Message
     
    KMI is projected to raise dividend to $2 a share in 2015 and grow it 10% each year until 2020. I sure hope I can get more tomorrow!
    10 Aug, 09:58 PM Reply Like
  • fincyn
    , contributor
    Comments (61) | Send Message
     
    Like some other commenters here, I'm long KMI & KMR, and am (1) thinking this is good for us; (2) wondering about transaction specifics and tax consequences. In any case, KMI will remain in my portfolio for the long term.

     

    As an aside, I suspect that this says Kinder believes KMP is undervalued -- some other analysts seem to agree.

     

    Just read the PR on the KM investor site: (1) Looks like the KMR to KMI is a stock for stock deal, so no tax consequences. (2) KMP holders will get some cash in addition to stock, so there's tax to pay.
    10 Aug, 10:03 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Not the way I read it. KMP,KMR, EPB all going away. Says it will be taxable and even breaksdown "average" tax cost, but conveniently sidesteps the REAL taxable costs of ROC.
    11 Aug, 02:10 AM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    surfgeezer,

     

    Look at slide 12 again. No tax for the KMR exchange.
    11 Aug, 02:18 AM Reply Like
  • Hendershott
    , contributor
    Comments (1543) | Send Message
     
    Voice.....really good question on the taxes for the LP holders!....recoup all those dividends?......This is a process sweeping through the MLP/LP bunch....WMB recently....ETE proposed a rollup with NGLS et. al.....likely haven't heard the last of that deal....cuts the cost of capital dramatically....those who don't roll up will have a hard time competing.....OKE probably next.....
    10 Aug, 10:04 PM Reply Like
  • b3player
    , contributor
    Comments (232) | Send Message
     
    Ok help me out here. A quick calculation for KMR holders. We will get 2.4849 shares of KMI for every 1 share of KMR, right? 100 shrs of KMR right now earns about $5.56 unit distributions (which is actually buying more KMR stock) annually ($556 for 100 shrs).. However when KMR shrs are converted into KMI shares at $2 unit distribution annually, my 100 shrs of KMR is now only earning $496.98 (2.4849 x 100 = 248.49 shrs x $2= $496.98). This is about a decline of 9% of dividends. Am I calculating this right?
    10 Aug, 10:05 PM Reply Like
  • longhorn.ital
    , contributor
    Comments (8) | Send Message
     
    You didn't think they were doing this for your good did you?
    10 Aug, 10:22 PM Reply Like
  • Capt.Gene
    , contributor
    Comments (82) | Send Message
     
    Less dividend more growth and a faster growing dividend.
    I have both ETP and LINE and LNCO holdings, and I suspect Monday may be a banner day for me.
    10 Aug, 10:28 PM Reply Like
  • Cheese Head
    , contributor
    Comments (211) | Send Message
     
    b3 correct, but after 2015 div of $2.00 the increases will be higher 10%/yr so you will quickly catch up.

     

    However for me as non-American (Canadian) working and living in Qatar we were not paying any tax on KMR "distributions" (my wife and my biggest position). So for future KMI divs I will be taxed at 35% div withholding tax, so income wise I will take a much bigger reduction.

     

    But longer term KM is doing this to enable higher profits and thus the projected faster div increase rate of 16 > 10%/yr which I believe will result in significant KMI share price appreciation.

     

    Therefore my knee jerk reaction is to hold tight and hold the consequent KMI shares. Will reevaluate as more info available, will be an interesting Monday!
    10 Aug, 10:34 PM Reply Like
  • Cheese Head
    , contributor
    Comments (211) | Send Message
     
    Yes I do believe they are doing this to benefit shareholders.
    10 Aug, 10:37 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Dear b3player:

     

    That's how I'm calculating it. However,also remember that you are going to have unrealized gains of 248.49*(36) - 100*77 = $1245.64 So, you will have a 1245/7700 = 16% unrealized capital gain. And this does not take into account additional potential gains due to changes in price resulting from market reactions.

     

    Sincerely,

     

    VTFI
    10 Aug, 11:14 PM Reply Like
  • NV_GARY
    , contributor
    Comments (2142) | Send Message
     
    Capt g -
    Why LNCO?
    10 Aug, 11:39 PM Reply Like
  • KRV
    , contributor
    Comments (142) | Send Message
     
    If you own KMR in an IRA, you will get 16.5% unrealized gains that you can immediately cash in with no tax impact at all. In my view, selling now may not be the best for long-term investors because I see the 16.5% premium as a 'compensation' by management to KMR shareholders to 'endure' slightly lower dividends in KMI, which, by the way (at 10% growth annually as projected), will catch up within a year or two to what you were getting with KMR. Think of it as getting paid upfront for slightly lower dividend yield in KMI in the next 1-2 years. So, it is a win for KMR holders in my view.
    10 Aug, 11:55 PM Reply Like
  • Rob1492
    , contributor
    Comments (264) | Send Message
     
    One difference is that these dividends should be qualified so in taxable accounts will not be treated as ordinary income like regular MLP distributions
    11 Aug, 02:00 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    KMI shareholders, who SIGNED UP for qualified divs.

     

    The rest of the people are having the ENTIRE reason they bought the OTHER ones-tax deferral, get crammed down their throat.

     

    Long both, but disgusted.
    11 Aug, 02:15 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    ASSUMING it is in a tax deferred account.
    11 Aug, 02:17 AM Reply Like
  • Khyber Pass
    , contributor
    Comments (238) | Send Message
     
    I don't get the problem with paying taxes. I'm now in lower income bracket, so unlikely to pay more of a percentage in taxes than some. But if I made the money, I would expect to pay the taxes, and if I had enough shares to make it a substantial income and the commensurate taxes, well that's life.

     

    Taxes are the price I pay for civilization. Are there people here who make so much money they pay more than their share? People who make money and whine that it's never going to be enough? What?????

     

    I understand reluctance to turn over any of the few dollars a share people get for their investments. I'd much prefer saving my money in something that pays the interest that we used to get in the old days, but who wouldn't want 10% + - return? Those days are over as long as the plutocrats buy legislation to suit themselves and get to rule rather than govern. But that's a bigger issue than I want to think about lately.

     

    As for taxes on dividends, I'm willing to pay as long as the money buys the nation peace and keeps my army nephew CONUS instead of in a lunatic war in the middle east. (Faint hope, that, under current ruling class).

     

    So….any taxes I pay to support invasions that profit the munitions makers and hurt the rest of us, those I resent. But paying taxes when I'm making money…..not so bad……
    What is the worm in the apple part of my thinking? Please enlighten.
    11 Aug, 07:40 AM Reply Like
  • kevcl6750
    , contributor
    Comments (50) | Send Message
     
    The MLP structure is designed to share more of the wealth with investors ! Savers and investors are getting screwed by current monetary and fiscal policy which combines to pay low interest and flood the market with cheap dollars ! XOM is a classic example of a bad deal ! They pay a taxable dividend of 2.7 % vs almost 10 % tax advantaged distribution by the likes of BBEP and LINE . Kinder is bucking the trend here and I am glad I never took the bait ! COP on the other hand has done the opposite and split off an MLP . COP is the best performing major oil company for the last 5 years !
    11 Aug, 08:21 AM Reply Like
  • ctgot
    , contributor
    Comments (13) | Send Message
     
    It's about tax avoidance.

     

    People structure investments - just like companies structure themselves - to avoid as much tax as possible. Different types of events trigger different tax rates/implications.

     

    This event may trigger tax repercussions that many had not planned for, causing them to pay a much higher rate or not have an alternate loss to balance it out.

     

    If you consider this 'found money' then no, it's not a big deal. Those who considered this consolidation a foregone conclusion, valued that into the investment, and had appreciated a different combination that these buyout format.

     

    People clip coupons to save 40cents; spending some time to save a couple hundred in taxes is worthwhile....
    11 Aug, 08:49 AM Reply Like
  • mydogmoe
    , contributor
    Comments (362) | Send Message
     
    I agree with you Khyber. These guys always whine about taxes. Simple solution, lose money and you want have to pay...
    11 Aug, 09:06 AM Reply Like
  • Capt.Gene
    , contributor
    Comments (82) | Send Message
     
    There are 15 Billion dollars worth of capital projects on the books that will surely benefit from cheaper and more readily available money.
    And I believe there are 25 millions shares short this morning. I hope Bloomberg and HedgeEye burn to the ground!
    11 Aug, 09:37 AM Reply Like
  • Capt.Gene
    , contributor
    Comments (82) | Send Message
     
    LINE is an MLP and LNCO is how the shares are owned/traded by those who do not want to deal with the MLP status.
    If LINE decided to do away with their MLP status, and i am not saying they will do so, but it could be done.
    Do they learn from watching what goes on with KMI here? You bet!
    If there are 25 millions shares shore KMI today, the squeeze may be legandary!
    11 Aug, 09:45 AM Reply Like
  • TimeBandit
    , contributor
    Comments (6) | Send Message
     
    Would this announcement be a reason to buy KMR at tomorrow's opening or is that a risky move?
    10 Aug, 10:06 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    Buying at the open is always a risky move! I wouldn't if I were you.
    10 Aug, 10:42 PM Reply Like
  • efactor
    , contributor
    Comments (337) | Send Message
     
    bear, the bid price for KMR at open tomorrow is already set at 80.04 which is much less than the premium you are receiving in KMI shares. So how does that constitute a risky move? As I see it KMR shares will rise up to the 16% premium within minutes of the opening bell Mon.
    10 Aug, 10:55 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Dear TimeBandit:

     

    The price may jump quickly at the open. Otherwise, anyone could make 15% based on the closing prices on 8/8/2014.

     

    Sincerely,

     

    VTFI
    10 Aug, 11:16 PM Reply Like
  • Rob1492
    , contributor
    Comments (264) | Send Message
     
    Don't you think KMI prices will come down? If they do the conversion price should fall with it...
    11 Aug, 02:39 AM Reply Like
  • FleetUSA3226
    , contributor
    Comments (717) | Send Message
     
    Ber fore open on KMI is >42
    11 Aug, 08:52 AM Reply Like
  • Tom PIII
    , contributor
    Comments (3) | Send Message
     
    Own kmi kmp and kmr. Would like to see a review of the tax implications
    10 Aug, 10:13 PM Reply Like
  • Patience29
    , contributor
    Comments (177) | Send Message
     
    "KMI expects a $2 annual dividend in 2015, a 16% boost to 2014's anticipated payout. The dividend is expected to grow about 10% per year through 2020."

     

    As a KMI shareholder....I'm pretty darn comfortable with that. Long.
    10 Aug, 10:17 PM Reply Like
  • DontFollowMyAdviceImaDummy
    , contributor
    Comments (47) | Send Message
     
    This news scares me because "mergers always go great"... not... and it would mean that for the first time I bought a stock before something probably really good happens (and that NEVER happens to me, this stuff always go wrong for me). I hope my stock picking jinx/curse doesn't effect this.
    10 Aug, 10:20 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    Hope you got lucky this time!
    10 Aug, 10:43 PM Reply Like
  • CMPMD
    , contributor
    Comments (109) | Send Message
     
    Well DontFollow, if it doesn't go well, at least now we'll know who to blame...
    10 Aug, 11:20 PM Reply Like
  • TEX1961
    , contributor
    Comments (49) | Send Message
     
    Looks like you just changed your luck!!
    10 Aug, 11:43 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2646) | Send Message
     
    Hi Dont'tFollowMyAdviseIm...

     

    I think your luck has changed. My crystal ball is seeing a lot of green on the screen today. I am holding, I want my 2,48 KMI shares for my KMR shares. We must be patient.
    11 Aug, 09:15 AM Reply Like
  • Rob1492
    , contributor
    Comments (264) | Send Message
     
    Thank you Dividends !

     

    Bought KMR on your lead ! Checked out today after a nice quick gain!
    11 Aug, 11:43 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2646) | Send Message
     
    You are welcome Rob,

     

    I am holding. I think once the dust settles this could be a bigger gain than we think. I really want those 2.48 KMI shares. I will sell a portion at some point and buy some ED.

     

    I am not sure that KMR will break $100 again however I think the probablity is in my favor. My large concentartion is paying off contrary to the majority of voices regarding my portfolio.
    11 Aug, 12:19 PM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    KMR intraday high so far is 99.77. 100 is closer than you think.
    11 Aug, 12:49 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2646) | Send Message
     
    Hi Be Here Now,

     

    I know. I also saw pre market at $106 or $107, Are you holding?

     

    Thanks for being one of the first t o teach me about KMR.

     

    There is a list of about 7-10 people here at SA who taught me about the Kinder entities, I did decide that KMR was the best of the bunch and I think I was correct. Your thoughts are appreciated.
    11 Aug, 01:05 PM Reply Like
  • Rob1492
    , contributor
    Comments (264) | Send Message
     
    Hi Dividends!

     

    The bottom line is the market liked the move so the price is up... But in reality the current price does not make sense... For KMR should be in the 80s and when the dust settles will come back down to that
    11 Aug, 01:18 PM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    Dividends#1,

     

    I first bought KMR and KMI in 2011, and very happy that I did. I plan to hold for the long term.

     

    Glad I could put you on to Kinder. ;-)
    11 Aug, 01:22 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Moving forward, KMR price will be a factor of KMI. Since Mr Kinder has established that every KMR = 2.48 KMI, KMR will follow KMI price changes.

     

    Currently (at 2.28 PM EST) KMI is at 40, so KMR will technically reach 100. As simple as that
    11 Aug, 02:28 PM Reply Like
  • Rob1492
    , contributor
    Comments (264) | Send Message
     
    I get the math... but the reality is KMI is incorporating both KMR and KMP at a premium which in actuality should depress its price... instead it is up about 11%. This is because the market likes the move. But the market typically overshoots in both directions.... when it likes you get a premium to actual value as I believe is happening in this case. When it dislikes you get a discount. Thus I would not expect KMI to hold 40 for long nor would I expect KMR to be close to 100 for long
    11 Aug, 02:37 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Hi Love Money:

     

    I have been discussing the current KMR/KMI situation with dividends#1, since he recently wrote an article on why he holds KMR

     

    http://bit.ly/1l2NTdK

     

    He has suggested that I examine premiums for acquiring new KMR shares. Of course, most of the profit you realized was based upon KMr shares you acquired prior to this Monday 8/11/2014.

     

    You can look at the mathematics for the premium computation for the proposed purchase of additional KMR shares:

     

    I--You can derive the breakeven buyin point for profitability going forward for additional puchased shares of KMR.

     

    On any additional purchased KMR shares, the instantaneous premium is based upon the current prices of KMR and KMI and therefore the RATIO of the current KMR to KMI price :

     

    Premium = 2.48*(New KMR shares)*KMI price - New principal

     

    = 2.48* (New Principal/KMR price)*KMI price- New Principal

     

    = New Principal*( 2.48*(KMI price/ KMR price) - 1)

     

    So the condition for break-even on new purchased KMR shares is:

     

    2.48*(KMI price/ KMR price) = 1

     

    or KMR/KMI = 2.48, the exact conversion metric , so going forward,

     

    if KMR/KMI < 2.48 you could reasonably add to kmr, otherwise wait.

     

    ALSO,

     

    There are TWO premiums, one (1) is measured when KMI and KMR trade at the same time ( instantaneous premium)

     

    the second (2) is based upon the price at which you add KMR shares and the price of KMI at conversion

     

    1) The ( instantaneous) premium = ( 2.485*(KMI/KMR) -1 ) * 100, expressed as percent

     

    where KMI = (current ) price of KMI

     

    KMR = (current) price of KMR

     

    2) The premium when the conversion takes place is:

     

    (2.485*(KMI_ at conversion/previousKMR... -- 1 ) * 100

     

    So if you think KMI is going to continue rising, then you will increase your premium

     

    (See formulas above for premium formula)

     

    For example, suppose you buy KMR now (93.60) at the same time that KMI is 38.52

     

    Then the instantaneous premium is

     

    (2.485*38.52/93.60 - 1) * 100 = 2.267 %

     

    The conversion premium =

     

    (2.485*(hopefully 50)/93.60 -1)*100 = 32.74%

     

    That is, if KMI is 50 at the time of the conversion

     

    VTFI
    12 Aug, 02:33 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Thanks VTFI. Looks very interesting.
    12 Aug, 04:00 PM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    I don't understand what you mean by "premium", or your math, or what you are trying to accomplish. Do you really need such complicated formulas to discover that fair KMR price = 2.4849 * KMI price?
    12 Aug, 04:13 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    VTFI formula calculates the premium %. For example, if you look at today's closing price of KMR and KMI, KMR is trading at 2.6% discount
    12 Aug, 04:27 PM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    I still don't get those complicated formulas. The relative premium/discount of KMR vs. KMI is of course the current market price of KMR minus 2.4849*KMI. The total return until closing of the deal is of course the sum of the discount plus any other market fluctuations of the KMR-KMI-"pair".
    12 Aug, 04:37 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Yes; You correctly summarized it
    12 Aug, 04:45 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Dear comeinvestwith me:

     

    They are not that complicated. All they state is the difference between the 1)the principal you put toward a new KMR purchase minus 2) the principal which results from a conversion to KMI (with the new added KMR shares). If you take the difference between these two values and divide by the principal you put toward the new purchase of shares, you get a percentage change. That is the premium.

     

    (2.48* (New Principal/KMR price)*KMI price- New Principal)/ New Principal

     

    This expression is what I was "trying to accomplish".

     

    I didn't mean for this to sound or appear unwieldly or complex.It really isn't. In fact, its useful in determining potential future gains from additional purchases of KMR going forward.

     

    Sincerely,

     

    VTFI
    12 Aug, 06:36 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    The equations state this more precisely and show the potential gain from actual changes in KMI and KMR prices.
    12 Aug, 06:57 PM Reply Like
  • tmbl
    , contributor
    Comments (6) | Send Message
     
    b3player....(Hammond)? i calculate the drop in my dividends the same as you....not sure I like this whole transaction....anyone out there have any thoughts?
    10 Aug, 10:23 PM Reply Like
  • b3player
    , contributor
    Comments (232) | Send Message
     
    tmbl, Hammond indeed. Thanks for noticing. I am also wondering why we didn't get an extra cash distribution like KMP ($10.77 shr) and EPB ($4.65 shr).
    10 Aug, 10:34 PM Reply Like
  • BTinSF
    , contributor
    Comments (153) | Send Message
     
    I'm wondering if the cash is going to the MLP owners and not to KMI owners because we MLP owners are going to have a big tax bill the KMI owners won't. It looks to me like the amount of cash we are getting is intended to pay the average tax bill. Problem is, I'm not average and suspect mine will be bigger because I've owned KMP so long.
    10 Aug, 11:19 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Yep, the longer (ha loyalty counts) the bigger the bend over. ALL that ROC will be back biting you in the azz.
    11 Aug, 02:21 AM Reply Like
  • romilar
    , contributor
    Comments (650) | Send Message
     
    Holy mackerel ! Long KMI and so glad I didn't sell.

     

    Love_money, I agree - too much to finger tonight. Methinks a lot of us will be glued to early morning news. I know I will...Rom
    10 Aug, 10:23 PM Reply Like
  • Plaintalk
    , contributor
    Comments (119) | Send Message
     
    In addition to owning KMI, KMR and KMP I have 50 contract leaps to buy KMI at $40 until January of 2016. What the f? happens with them? This stuff is fun. Not only that, but I have to get up at 6:30am Denver time to listen to these people talk.
    10 Aug, 10:26 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    You knew options were dangerous when you bought them, right? Don't worry though, I would bet that you come out way ahead on this deal.
    10 Aug, 10:44 PM Reply Like
  • Plaintalk
    , contributor
    Comments (119) | Send Message
     
    Yes, I knew.
    10 Aug, 10:47 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Have lots of options myself. Fully expect the KMP, Net priced Puts-71.13$,
    KMI, Net priced Puts-29.35$,30.06$,30.... to go to 5 cents quickly. So at least my profit on those to happen way early.

     

    Don't know if you figure Annualized yield, but mine just jumped I believe.

     

    Guess it depends how you define dangerous. Every one of those prices, I would have been happy to be long at.
    11 Aug, 02:30 AM Reply Like
  • Lookingforincome
    , contributor
    Comments (15) | Send Message
     
    If you go to the Kinder corp website there is a presentation posted on the proposed merger. If I understand the KMP info correctly the exchange will be a taxable event and be fully taxable. The presentation provides some estimated tax calculations. I'm sure that is the reason for the cash consideration for KMP and EPB. The KMI shares will be exchanged for KMI with out any tax effect
    10 Aug, 10:30 PM Reply Like
  • Asmallguy
    , contributor
    Comments (2) | Send Message
     
    I don't want the cash payout! Should I purchase KMI shares equivalent to the cash that I will get when the buyout is completed?
    10 Aug, 10:30 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    Well..... I guess this move should shut up the naysayers (and one analyst in particular) who carried on about KMI "abusing" its General Partner status.
    10 Aug, 10:34 PM Reply Like
  • Dr Fred
    , contributor
    Comments (80) | Send Message
     
    All advice to the contrary not withstanding, I hold KMP in my IRA. Since no income in my IRA is taxable until I take it out, this sounds like a great deal for me. Am I right?
    10 Aug, 10:39 PM Reply Like
  • CMPMD
    , contributor
    Comments (109) | Send Message
     
    Dr. Fred,

     

    I believe you're right and certainly hope so since my KMP shares are primarily in my IRA too.
    10 Aug, 11:26 PM Reply Like
  • 1951Mike
    , contributor
    Comments (18) | Send Message
     
    Long KMP. On the surface, I would think that to anyone holding/considering KMI as a growth and income stock, it just became much more attractive, a roughly 5.5% yield and indications of 10% growth for five years. It is a complicated transaction, but just on the yield jump and growth projection for KMI I would expect the stock to jump, maybe 5%. With the swaps, KMI-KMR-KMP, the other stocks should jump as well, beyond the premium set in the swap deal, to reflect the new price of KMI. We will see in the morning. As I say, it is complicated, lots of potential tax consequences, so we will see.
    10 Aug, 10:41 PM Reply Like
  • lsuavecito
    , contributor
    Comments (396) | Send Message
     
    Agree! Now, can U predict what happens to the KMI warrants?
    IMO, they should fly; also the Jan., 2016-40 Calls.
    10 Aug, 11:41 PM Reply Like
  • bearperney
    , contributor
    Comments (19) | Send Message
     
    One point I haven't seen made is that now folks investing their IRAs will be able to own the pipelines via KMI, and the dividends will not be taxed until withdrawal. Before now, complex tax situations have kept MLPs off of most Financial Planners script for their client's retirement accounts.
    10 Aug, 10:48 PM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    Long KMI, EPB, and KMR. Feel like I hit the lottery. Great news.
    10 Aug, 10:50 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Wait till you file your taxes on EPB.
    11 Aug, 02:39 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    All my KMI, KMR, and EPB is in my IRA. I let the CPA figure it out. He's pretty good.
    11 Aug, 02:44 AM Reply Like
  • Lookingforincome
    , contributor
    Comments (15) | Send Message
     
    Additional Tax information and estimates.

     

    I have held KMP in a taxable account since 2004 and 2006. My rough calculations are that about 95% of the Merger price will be reported as a Taxable gain. Because of recapture, about 50% will be ordinary gain and the balance of 45% will be capital gain.

     

    I also hold KMR in an IRA and KMI in a taxable account. There will not be any income taxes due from the merger for these units and common shares.
    10 Aug, 10:51 PM Reply Like
  • dataman2
    , contributor
    Comments (88) | Send Message
     
    Hi,

     

    Can you how to make those calculations, please?
    11 Aug, 02:18 PM Reply Like
  • Bruce Miller
    , contributor
    Comments (942) | Send Message
     
    dataman
    Go to http://bit.ly/1sO0upO, click on KinderMorgan and you will go to the tax support page. Log in (if you haven't already, you'll have to create an account using your LP # from your recent K-1) and go to the lower left of the screen and click on "Projected Gain/Loss Calculator". On the pop up screen, enter your total # units as 'disposed' and it will calculate for you the ordinary income and LTCG. Depressing.

     

    I'm not sure if the ordinary income includes or does not include cumulative losses. I called the 1-800 number, but the lady who answered wasn't sure.

     

    BruceM
    12 Aug, 01:15 PM Reply Like
  • tmbl
    , contributor
    Comments (6) | Send Message
     
    B3....my brother played a lot of blues...at last count he owned 5 B3's and several Leslies......We trade x # of shares of KMR for X+2.4849 shares of KMI.....which on the surface and for the moment seems to yield a capital gain, but we lose a large chunk of dividends, which is one of the most important reasons I own KMR.....I hate waiting for the market to respond...this is new stuff for me..
    10 Aug, 10:53 PM Reply Like
  • b3player
    , contributor
    Comments (232) | Send Message
     
    tmbl, .....I still play the blues, own three B3's, 7 leslies....it's an addiction. I think this (owning KMR shares) will shake out ok. I own my shares in a Roth IRA so for me, the tax ramifications are not a concern. For those holding shares in a taxable account, it looks like there will may be. However for a company that announces that they will increase the dividend at 10% annually for the next five years can't be bad news for DIG's.
    10 Aug, 11:01 PM Reply Like
  • efactor
    , contributor
    Comments (337) | Send Message
     
    The bid price for KMR at open tomorrow appears to be already set at 80.04 which is much less than the premium you are receiving in KMI shares. As I see it KMR shares will rise up to the 16+% premium within minutes of the opening bell Mon. Anybody agree, disagree with this assessment?
    10 Aug, 10:57 PM Reply Like
  • Rudester
    , contributor
    Comments (2257) | Send Message
     
    I've held KMP for several years and for most of that time I was reinvesting the dividend so hopefully my cost basis in KMP units has not declined too much to were the tax bite will be too painful.
    10 Aug, 10:58 PM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    You basically have very little cost on those DRIP shares, is the way it shakes out.
    11 Aug, 02:43 AM Reply Like
  • Plaintalk
    , contributor
    Comments (119) | Send Message
     
    Another thing--Expect the class action firms, the dregs of NYC and its environs to begin looking for Plaintiffs as they have their minions sorting through the numbers claiming that the transactions are unfair.
    10 Aug, 11:00 PM Reply Like
  • Young Incomer
    , contributor
    Comments (63) | Send Message
     
    I just bought a ton of KMR with 401k money too...Glad I did. Gonna continue holding.
    10 Aug, 11:04 PM Reply Like
  • lsuavecito
    , contributor
    Comments (396) | Send Message
     
    How does this affect the warrants that expire in 2017?
    10 Aug, 11:07 PM Reply Like
  • Destin
    , contributor
    Comments (472) | Send Message
     
    My big question too, I've got a few handfuls of those along with my KMR.
    11 Aug, 12:11 AM Reply Like
  • lsuavecito
    , contributor
    Comments (396) | Send Message
     
    Ditto + KMI.
    11 Aug, 12:13 AM Reply Like
  • aeroguy48
    , contributor
    Comments (635) | Send Message
     
    I will take the 10$ plus a share cash and invest in other MLP's
    10 Aug, 11:12 PM Reply Like
  • rheimerl
    , contributor
    Comments (356) | Send Message
     
    i think oks and ngls are the next canidates
    11 Aug, 07:12 AM Reply Like
  • smurf
    , contributor
    Comments (3973) | Send Message
     
    Already own KMI. I like this move.
    10 Aug, 11:40 PM Reply Like
  • smurf
    , contributor
    Comments (3973) | Send Message
     
    Altho, it is kind of contrary. Most energy companies are doing just the opposite...spinning off segments as MLPs. I believe Rich Kinder knows what he's doing, however.
    10 Aug, 11:47 PM Reply Like
  • TEX1961
    , contributor
    Comments (49) | Send Message
     
    Just doing some quick math, (I am long KMI) it appears that I end up with a higher dividend now and a pretty good bit of cash to invest in something else. It sounds good to me so far.
    10 Aug, 11:45 PM Reply Like
  • NV_GARY
    , contributor
    Comments (2142) | Send Message
     
    Tex-
    Where does it say KMI owners get cash??
    11 Aug, 12:47 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    All you get is higher growth and bump to div.
    11 Aug, 02:47 AM Reply Like
  • Paul L.
    , contributor
    Comments (19) | Send Message
     
    Many criticisms on SA about the structure of the Kinder Morgan companies. A lot of those folks felt like it was the structure of the KM family that was holding back the valuation and potential growth of each stock. Hopefully this will eventually put those concerns to bed and grow KMI in value as well as help to continually amp up the dividends. I wish I had gotten more KMI stock before today...but I suppose I'll just smile and buy more anyway for the future increased dividend income.
    10 Aug, 11:56 PM Reply Like
  • Chancer
    , contributor
    Comments (2737) | Send Message
     
    Color me disappointed.

     

    I have been long KMR only since 2005. I planned to accumulate tax deferred distributions to increase my shares with no additional cash investment for the next 10 years. Now with KMI I will have to pay tax on cash dividends every year instead of LT capital gains if I sell KMR distributions when I choose. I hope some of the KMI dividend will be ROC.

     

    For me, Kinder killed the golden goose. But I always did expect this as the biggest risk: management eliminating the good deal that KMR has been.

     

    I will have to study KMI to decide if worth holding or just cash out and take one whopping big capital gain. I will have to plot those projected (but not guaranteed) KMI dividend increases for next several years.

     

    Because Kinder shares are very volatile, I would expect that putting it all in KMI only might increase that volatility. The KMR valuation at 89.75 may drive up the share price for the arbitrage opportunity in the short term.

     

    Class action lawyers already announced scrutiny of the deal.
    11 Aug, 12:04 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    In the end, KMI will be more stable IMO because you won't have arb plays shorting EPB and going long KMI, KMP, KMR and then reversing the play.

     

    Lawyers always are chasing a buck. Wonder what the shorts are thinking right now.
    11 Aug, 12:17 AM Reply Like
  • trs80
    , contributor
    Comments (4) | Send Message
     
    Agree fully wrt year-to-year tax consideration on KMR share distribution (not taxable) vs KMI cash dividend.
    11 Aug, 12:43 AM Reply Like
  • Voice from Chapel Hill
    , contributor
    Comments (82) | Send Message
     
    I think RK said KMI will have lots of new depreciation, so some, or a lot of KMI's future dividend should be ROC. Maybe KMI will have some type of DRIP that will act similar to KMR?
    11 Aug, 12:51 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    Hopefully that will be answered on the conference call in the morning.
    11 Aug, 12:57 AM Reply Like
  • RWMostow
    , contributor
    Comments (1370) | Send Message
     
    KMI is one of my few holdings that is not a full position. So while I am happy for all of you, I am sad for me.

     

    -rwm
    11 Aug, 12:05 AM Reply Like
  • Asmallguy
    , contributor
    Comments (2) | Send Message
     
    I don't want the cash payout! Should I purchase KMI shares equivalent to the cash that I will get when the buyout is completed? A quick calculation suggest that my dividends in KMI will only be 83% of what I have been getting in KMP if I reinvest the cash.
    11 Aug, 12:37 AM Reply Like
  • roaree
    , contributor
    Comments (4) | Send Message
     
    I hope the AH shorters from the past 6 months have a nice MONDAY MORNING, they messed with the wrong fellow......
    11 Aug, 12:40 AM Reply Like
  • User 15269922
    , contributor
    Comment (1) | Send Message
     
    Is it better to sell KMP or take the buyout offer?
    11 Aug, 12:40 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    If you bought KMP for tax deferral, you are already screwed.

     

    That said, and many disagree, but I look hard at what your real yield on cost from your original buy is and with a hoped for bump to 10% div growth it may be worth it to hold and get the Qualified.

     

    If you are in a low bracket Qualified is not bad either.
    11 Aug, 02:58 AM Reply Like
  • pete1000
    , contributor
    Comment (1) | Send Message
     
    Would it be unwise to purchase KMP tomorrow morning? It was trading at 80.34 as of Friday and I am assuming that it will jump to $89.98 right away when the market opens tomorrow. Does that sound correct?
    11 Aug, 12:42 AM Reply Like
  • michaelliou
    , contributor
    Comments (3) | Send Message
     
    will KMR shareholders really have a taxable event? given that the in-kind div never gets taxed until sold (and then it's capital gain), i would envision the exchange would be non-taxable. but kmr/epb - that's a different story. will be interesting to hear the conf call tomorrow.
    11 Aug, 12:43 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Taxable sale, IMO. Don't see a way around that.
    11 Aug, 02:59 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    stand corrected. KMR, not taxable. No surprise, Kinder owns KMR the most so he comes out sweet.
    11 Aug, 11:03 AM Reply Like
  • trs80
    , contributor
    Comments (4) | Send Message
     
    Hold only KMR in a regular brokerage account. Don't understand why/how a stock-for-stock deal would be a taxable event, if anybody can explain I'd appreciate it. AFAIK the only immediate consequence is a calculation of cost basis for KMI shares obtained in the buyout...
    11 Aug, 12:43 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    You will now get qualified divs, so no more deferred in the future.
    11 Aug, 11:04 AM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    trs80,

     

    The KMR exchange is not taxable.

     

    Love your moniker ;-)
    11 Aug, 11:09 AM Reply Like
  • dparks16
    , contributor
    Comments (2) | Send Message
     
    I have owned KMP for 12 years and it had been a gold mine for me. This looks like a good deal as long as the stock given for stock is a tax-free exchange. Without that benefit, long term holders of KMP could be facing a very large tax bill due to the basis in this MLP.
    11 Aug, 12:43 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    ROC is coming home to bite.
    11 Aug, 03:00 AM Reply Like
  • Founder
    , contributor
    Comments (16) | Send Message
     
    dparks16

     

    I have also owned KMP for a long time. There will be tax consequences for us. Not withstanding the taxes, I received a 6% payout the 1st year, 24% for this year and should receive 33% next year under the new structure. The problem is any taxes will reduce that 33% payout, I just haven't figured out by how much.
    11 Aug, 03:09 AM Reply Like
  • maybenot
    , contributor
    Comments (3710) | Send Message
     
    Good news. Hold KMP & KMI.

     

    Now wait for the articles to flesh it all out.
    11 Aug, 01:05 AM Reply Like
  • dataman2
    , contributor
    Comments (88) | Send Message
     
    Ouch. My question is how much ordinary income will I have to pay taxes on.
    11 Aug, 01:05 AM Reply Like
  • NV_GARY
    , contributor
    Comments (2142) | Send Message
     
    No concerns about tax considerations, but why is it not addressed in their big presentation--or did I miss it?
    11 Aug, 01:08 AM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    NV_GARY and all,

     

    The slide presentation does address unit holder taxes.

     

    Slide 11 titled 'Substantial Value Uplift for KMP Holders' has a line item 'Implied Value Uplift (Pre-tax)' with a footnote that shows the estimated tax for the average KMP unit holder.

     

    Slide 12 is the equivalent for KMR unit holders and has a line item 'Implied Value Uplift' and does not have a similar footnote, thus the KMR exchange is not taxable.

     

    Slide 13 is the same for EPB unit holders, like KMP with estimated tax.

     

    Glad I own KMR and KMI, and not KMP or EPB.
    11 Aug, 01:57 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Notice that is pure value change- NO ROC calcs as the differ for each holder. The longer the hold, the deeper the bite.
    11 Aug, 03:02 AM Reply Like
  • dataman2
    , contributor
    Comments (88) | Send Message
     
    I can't find anything about taxes either.
    11 Aug, 01:23 AM Reply Like
  • EZDAN
    , contributor
    Comments (15) | Send Message
     
    Own KMI, EPB and KMP. Is the deal not a wash for me since whatever benefits KMI receive the MLP's lose and vice versa.
    11 Aug, 01:34 AM Reply Like
  • matt_
    , contributor
    Comments (43) | Send Message
     
    The Kinder complex might trade at a discount to other energy companies due to the complicated structure. Also, one of the cited benefits is for a lower cost of capital. The presentation mentions $2 billion excess coverage if I'm not mistaken. At the very least, I think you could consider the KMI move defensive against rising rates and a potentially strained ability to fund the distribution growth it targeted.

     

    In other words, I think the purpose of the consolidation is to enhance shareholder value over the long term. I do not believe this is a zero sum game. Last, considering the pre-market indication, you are getting a significant boost to your unrealized value - if you don't like the merger, you still win by dumping the shares at a premium that you wouldn't have touched in the near term, and buying something you prefer.
    11 Aug, 07:27 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    I wonder how KMI's shareholders will be compensated for the KMP units KMI holds? Will those units simply vanish or will there be a some stock dividend to KMI shareholders?
    11 Aug, 01:46 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    KMI is buying those shares. There simply will be more KMI shareholders. Hesitate to call it a dilution, more like cannibalism of you offspring.
    11 Aug, 03:04 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    Surf: KMI doesn't have to buy KMP units that it already owns. KMI owned outright about 43,000,000 KMP units and 90,000,000 EPB units. See http://seekingalpha.co...

     

    I don't see Rich Kinder giving the value of those KMI owned units to the unitholders of KMP and EPB. There must be some trigger to push that value out to KMI holders.
    11 Aug, 03:25 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    Sorry, too tired to think straight. Since the partnership entities will continue, KMI will simply own 100% of each entity, both general and limited interests as well as IDRs.
    11 Aug, 04:05 AM Reply Like
  • surfgeezer
    , contributor
    Comments (6928) | Send Message
     
    Absolutely correct, bb. They will be buying about half-the public's, not their own. I read the comment wrong.
    11 Aug, 10:56 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    I don't see an IRC provision that says that an exchange of corporate stock for units of a partnership are a tax free exchange -- it surely is not a corporate reorganization or a "merger" of partnerships. It seems to me that the exchange will be taxable to the partnership owners, who will potentially have some capital gain and potentially recapture of years of ordinary income deductions in the case of KMP and EPB holders.

     

    Here is an interesting link to a summary of some rules that relate to pass through tax entities. http://bit.ly/Xc5vyR

     

    This will be interesting to see play out and the legal analysis of anyone who says it will be a tax free exchange for holders of partnership units.
    11 Aug, 01:58 AM Reply Like
  • dataman2
    , contributor
    Comments (88) | Send Message
     
    Hi,

     

    Can k1 be used somehow to estimate ordinary tax liability?
    11 Aug, 12:04 PM Reply Like
  • Rudester
    , contributor
    Comments (2257) | Send Message
     
    Look at your capital account entry.
    11 Aug, 12:19 PM Reply Like
  • Donbagel
    , contributor
    Comments (3) | Send Message
     
    Taxes or no taxes, Rich Kinder is making KMI a growth stock with a very decent dividend going forward. If it all plays out correctly, there is going to be some major capital appreciation in this stock! Stay long or go long, there will be a lot of money to be made with KMI!!!!!
    11 Aug, 02:33 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    I would think KMI would be 40 by the end of the year. 2 buck dividend is 5% of stock price of 40. Get some capital appreciation on top of that and KMI will be OK and relatively safe stock to own.
    11 Aug, 02:40 AM Reply Like
  • tomlos
    , contributor
    Comments (1117) | Send Message
     
    or by the end of todays trading session...
    11 Aug, 08:27 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    Good one. Who would have thought.
    11 Aug, 10:43 AM Reply Like
  • Be Here Now
    , contributor
    Comments (4143) | Send Message
     
    So far today's high is 42.49.
    11 Aug, 10:49 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    I sold half my KMI at 42.66 pre-market.
    11 Aug, 10:56 AM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    My view is contrarian. I can't see anything positive in this news. The consolidation just shuffles income streams around; it does not add or destroy the total income streams of the underlying pipeline operating profit. Former KMP and KMR shareholders lose the ability to defer taxes almost in perpetuity, which they had before. They also lose the benefits of the MLP structure avoiding double taxation. MLPs take advantage of a special provision of the tax law, which is the main reason for MLPs to exist as partnerships in the first place. KMI shareholders will generate income from pipelines, like a zillion other infrastructure companies and funds worldwide, but they lose the (management fee) based income from the partnerships that allowed them to benefit over-proportionally from growth projects, without having to invest their own capital, which made KMI in a way special vs. the rest of the utility and infrastructure investment universe. In summary, I don't understand the motiviation, and I can't see anything good in this news. A motivation that I could think of is that RK realized that margins would eventually decrease, and the good old "double-dipping" (tax-free income for KMR and fee-based income for KMI, from the same underlying income stream) would not be sustainable in the long run. This would be overall bad news, as less total income would be available to be distributed to the various entities (or to the consolidated entity), than before. The official motivation "will allow us to further expand the reach of the kind of projects we can do" is vague, and may just be a polite way to admit the prospect of less prosperous total growth and income streams in the future, necessitating this consolidation.
    11 Aug, 02:49 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    I can see a motivation. KMI will be cutting total distributions to existing KMP and EPB unitholders in a substantial amount, giving KMI more free cash flow to invest.

     

    I don't see a tax free exchange in the works, so KMI could get a huge stepped up tax basis in the KMP and EPB assets, meaning more depreciation to shelter cash flows. Of course, KMP and EPB holders will have a taxable event resulting in some element of many years of ordinary income recapture in a single tax year plus capital gain.

     

    I don't see at the moment what KMI does with the 40+ million units of KMP it owns or the 90+ million units of EPB it owns. Most of KMI value at the moment is its holdings and IDRs in those entities. Is it simply monetizing those holding by borrowings?

     

    It is too late in the evening for me to review partnership tax issues relating to the transaction and significant elements do not seem to be explained yet.

     

    It will be interesting to get the full story.
    11 Aug, 03:38 AM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    I'm not sure if I understand "KMI will be cutting total distributions to existing KMP and EPB unitholders in a substantial amount, giving KMI more free cash flow". KMI had other investor's money working for them, and generating handsome fee income (50% of profits of from others' invested capital). Again, the only *rational* conclusion that I can draw is that the consolidation is a necessity because of management's realization of declining prospects and margins in the future. The dimished future growth in cash flows need to be split among the shareholders of all previous entities (now to be consolidated). Regardless how precisely this is being done, since money cannot be created from thin air, there will be winners and losers. That is not to say the consolidated company will not be profitable or successful; all I'm saying is I can't see anything positive in this deal, and it may be an indication of a less prosperous future than it could have been otherwise. There are also the negative tax consequences and loss in working capital for many investors, which RK may have cared little about when he crafted the deal. When an LP spinoff suits his (or KMI's) needs, it will be created, luring retail investors with tax-deferred income for life; when he figures something that suits him better, the LP is scrapped and investors fork over their accumulated depreciation expenses for the IRS all in one year. Not sure why many on this forum glorify this guy like a personality cult.
    11 Aug, 04:04 AM Reply Like
  • ipaduser
    , contributor
    Comments (700) | Send Message
     
    I expect a nice pop in these stocks tomorrow, and some volatility in the coming months as things sift out.

     

    I own KMP, KMR & KMI...KMP at a zero basis, the others have been accumulating
    the last few years.

     

    Guess I'll talk to my tax guy, maybe put my house on the market... no taxes to pay there, unlike with KMP...

     

    Maybe get that Winnebago I've been wanting.
    11 Aug, 03:36 AM Reply Like
  • badbernanke
    , contributor
    Comments (232) | Send Message
     
    KMP at zero basis? Look for 100% of the proceeds for KMP to be taxable to you, some significant portion likely to be ordinary income recapture and then capital gain. Wait to talk to your tax guy before you close on the Winnebago.
    11 Aug, 04:08 AM Reply Like
  • ipaduser
    , contributor
    Comments (700) | Send Message
     
    Yes, I know what zero basis means.
    But according to the pre-market I might can keep the house and also get the 'Bago.
    People are excited...
    11 Aug, 09:15 AM Reply Like
  • Cheese Head
    , contributor
    Comments (211) | Send Message
     
    Now 4:35AM New York Time and according to Yahoo Finance, KMI Pre-Market is as USD39.00, +8%!

     

    Woo-Hoo, for my KMR that means (77.02+16.75%=89.75) x 1.08 = 98.96, +25.85% on Friday's close!
    11 Aug, 04:40 AM Reply Like
  • njbother
    , contributor
    Comments (307) | Send Message
     
    I'll sell all in the premarket for a slight premium to the offering. It will take time for the dust to settle, and I'll bet I can come back in a few months from now at better prices.
    11 Aug, 07:47 AM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    When are these changes effective? Anyone know?
    11 Aug, 09:05 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    Unit and shareholders have to vote and KM thinks by EOY.
    11 Aug, 09:18 AM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Ok. Thanks. Lot of trading opportunities in KMR and KMI
    11 Aug, 09:23 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    Sold 67% my EPB at average of 43.32, half my KMR at 101.60, half my KMI at 42.66 pre-market. It's a zoo.

     

    Way better then I thought.

     

    Update: Sold more EPB at 43.66. down to 33% of my original holdings.
    Too good to pass up.
    11 Aug, 09:18 AM Reply Like
  • mydogmoe
    , contributor
    Comments (362) | Send Message
     
    In my view, the sweet place to be is KMR, KMP and EPB in tax deferred accounts. If you have KMI in a taxable account no taxes should be due unless you sell the stock. I really don't think any taxes are due on the others unless you make a withdrawal and that would be considered regular income....
    11 Aug, 09:18 AM Reply Like
  • Capt Jack Daniels
    , contributor
    Comments (1096) | Send Message
     
    Seeking profits was wrong about selling KMP under 80.
    11 Aug, 10:13 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    That's exactly why you should do your own research and buy when the opportunity presents itself like end of March 2014.
    11 Aug, 10:45 AM Reply Like
  • PACKER man
    , contributor
    Comments (132) | Send Message
     
    All my KMI and KMR in ROTHS so ,"What, me worry"???

     

    Look at EEQ for the next parallel exchange...KMR and EEQ are/were the only companies structured as large stock only pay outs without K-1s...have owned them for years and finally great news regarding KMR...waiting for EEQ to follow???
    11 Aug, 12:38 PM Reply Like
  • trs80
    , contributor
    Comments (4) | Send Message
     
    Ditto that, although EEQ just spun off SSE...
    11 Aug, 01:39 PM Reply Like
  • morefiles
    , contributor
    Comments (2) | Send Message
     
    kmp with a negative basis capital account on my last k1 of -$27 .. so my estimated capital gains are $27+ $94 (todays price?) x 15% capital gains rate (for us poor people?) is there anyway to avoid this gain by say - transferring to my ROTH (too late?) gifting to my under 18 kids? charitable giving
    11 Aug, 01:55 PM Reply Like
  • PACKER man
    , contributor
    Comments (132) | Send Message
     
    My friend, SSE was spun off from CHesapeake energy, sorry to make a correction...
    11 Aug, 02:51 PM Reply Like
  • Rudester
    , contributor
    Comments (2257) | Send Message
     
    Heard on CNBC this morning about certain insider transaction "irregularities" that occurred one or two days before the public announcement.
    11 Aug, 03:21 PM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    With all the parties involved to make this happen, I was surprised the stocks didn't move.
    11 Aug, 03:22 PM Reply Like
  • Scooter-Pop
    , contributor
    Comments (2034) | Send Message
     
    MLP's willing to pay crazy EBITDA multiples for assets. I see it as the froth exposing a market top in the Midstream Space. Rich Kinder is positioning for the carnage, picking the cherries from MLP's struggling after paying too much. Similar circumstance when Shell bailed out to Sanchez, Shell losing plenty because they spent too much. Now Shell getting into the MLP space while Rich Kinder sees it as a time to exit? I'm with Mr. Kinder!
    11 Aug, 04:25 PM Reply Like
  • 1951Mike
    , contributor
    Comments (18) | Send Message
     
    2. QUESTIONS. .

     

    1. Does the $10.77 per share of KMP need to be taken as cash? can it be taken as KMI shares? How could I do that, short of buying KMI with the proceeds when I get the cash?

     

    2. It looks like the best deal right now is to buy KMR. At 2.4849 shares of KMI for each share of KMR - current price At 94.28 per share of KMR and $39.02 for KMI you can get 2.4849 shares of KMI for $94.28 or $37.94 per share, saving over a buck per share for KMI. Am I doing that right?
    12 Aug, 10:50 AM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    KMI and KMR are NOT trading in lock steps. They are supposed to, but they are not. KMI is now at 38.5 and KMR at 93.2, where as KMR should be 38.5 X 2.4849 = 95.67. Not sure why, but I tend to think buying KMR is now is much better than buying KMI. Hope market will catch up to this inefficiency soon
    12 Aug, 11:44 AM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Hi Love_MOney:

     

    That is precisely why I wanted to show exactly how you can incorporate the deviation from lock step trading in a formula and track the premium if any which may result from this phenomenon.

     

    Thanks for your post.

     

    VTFI
    12 Aug, 07:19 PM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    Are you assuming that the rest of the investors cannot do the math (multiplication by 2.4849) for this obvious risk-free arbitrage opportunity, giving you an information advantage? Or could it be that the market attributes a small likelihood of the deal falling through, which would reverse Monday's gains and result in ca. -25% for KMR?
    12 Aug, 08:35 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Dear comeinvestwithme:

     

    There is no need to be so nasty and sardonic about all this. All I did was present a formula which shows the potential premium (expressed as a percent) based upon buying additional KMR now ,and holding KMR until the conversion takes place. I have no doubt that most people can do this calculation and I certainly don't have any schemes or market advantages in mind. I was just trying to be helpful, and I thought that SA was a forum which should encourage people to express opinions and exchange information, and not harshly judge or criticize others.

     

    Sincerely,

     

    VTFI
    13 Aug, 08:54 AM Reply Like
  • comeinvestwithme
    , contributor
    Comments (186) | Send Message
     
    Sorry, thirsty_for_income, neither of my two questions were not meant to be sardonic at all. The arbitrage seems tempting to me, but so obvious and simple, that I questioned its validity for myself, and I'm wondering what the likelihood is of the deal falling through. Tail risks should not be neglected in portfolio construction or special situations arbitrage. An arbitrage may not be an arbitrage when taking into account all possible scenarios.
    14 Aug, 04:01 AM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Hi comeinvestwithme:

     

    Yes, certainly if the deal is not consummated then there is no longer a favorable arbitrage nor a "premium" at all , because KMI will certainly decline sharply, regardless of the price of recently purchased KMR, or for that matter, all shares of KMR you owned prior to 8/11/2014. In that case, what was a premium turns into a fraction <1, and you have a definite loss ( a negative percent). Being that I am an engineer, I tend to lose focus on the commercial perspective and get bogged down in the numerics. I tend to view porfolios , positions and dividend income analytically, given my background. I do wish I had more of a business sense to more accurately assess and weigh each and every issue involved with the companies in the proposed consolidation..

     

    The quick +25% that has been realized on shares owned before 8/11/2104 has been converted into a permanent gain early Monday by some of the commenters. So far, I am holding my position (in KMR).The question is obviously what should the buy-and-hold investors ( like myself) do according to the anticipated /most likely final outcome (whatever it is )in the fourth quarter. I would hope that the proposed consolidation would be viewed in the positive sense by the market, and that it would ultimately facilitate growth in KMI and also more particularly KMI dividend growth, since my number one focus is retirement income. I do not own any KMP anywhere. I own KMR in a taxable account.

     

    Take care,

     

    VTFI
    14 Aug, 01:39 PM Reply Like
  • Love_ Money
    , contributor
    Comments (169) | Send Message
     
    Thanks VTFI for taking the time to post the formula for the potential premium. It is very useful.

     

    I now have an excel that calculates premium using your formula using the daily closing price.
    13 Aug, 09:20 AM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (508) | Send Message
     
    Dear Love_money:

     

    You are welcome.I use excel for all calculations which relate to my portfolio performance,dividend income levels, allocation percentages and appreciation, including this formula which tracks gain from adding shares of KMR.

     

    Good luck !!

     

    Sincerely,

     

    VTFI
    14 Aug, 11:38 PM Reply Like
  • User 8256201
    , contributor
    Comment (1) | Send Message
     
    I bought KMP this year so have only received dividends for 2 quarters. I ant to exchange my shares. I bought them for around $77, a share. Will I have to pay short term gains?
    18 Aug, 12:38 PM Reply Like
  • raykrv6a
    , contributor
    Comments (2714) | Send Message
     
    I will buy the shares for $77 so you won't have to pay any taxes. OK?
    18 Aug, 12:40 PM Reply Like
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