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  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    On MLP requirements, you are correct, they have to get 90% of their income from specified sources, and their LPs are taxed on that income whether it is distributed or not (partnership tax treatment). If they didn't distribute enough to pay those taxes, the LPs would be rather cross, that's all. On KMIs taxes, it has paid only about $2 billion in the last 4 years, with over $14.5 billion in operating income in the same time frame, so only about 14% taxes paid.
    Dec 1, 2015. 03:22 PM | Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    PendragonY - REITs and MLPs distribute most of their earnings because they are legally required to by their structure, which is based on pass through of that income to be taxed at the individual level, bypassing corporate taxes. C corporations have no such legal requirements and thus no need to pass through all of their income in distributions. It is purely voluntary, if they do so. In the case of KMI, they want to use large loss carry forwards to absorb corporate tax liability, which wouldn't be available or helpful as an MLP or REIT; in return, they will owe corporate taxes someday; also in return, they have the flexibility to retain earnings as the management sees fit. Except it doesn't see fit - it runs leverage 6x and distributes all operating cash flow and then also spends the same again on cap ex, raising that in endless additional borrowing and share issuance.

    They got their credit outlook downgraded by Moody's yesterday for splashing out yet more to go up to 50% on a JV, putting themselves on the hook for up to $3 billion more in debt (or at least their half share of it, if they are willing to lose the investment). The company they are thus half-absorbing would be going bankrupt otherwise. Pledging the same cash flow 3 to 4 times over is their entire business model. The bondholders think it is theirs, the operating parnters think it is theirs, the line gets it for cap ex, and the shareholders get it for dividends. The same horse in every place only works because new cash is slurping in continually, from Wall Street. It is the roach motel capital model - capital checks in but it can't check out.

    Reference for the Moody's action -
    Dec 1, 2015. 12:25 PM | Likes Like |Link to Comment
  • Gold hits five-year lows as investors bail [View news story]
    "there will be at some point a trigger"

    Since if a thing cannot go on forever, it will stop, that's clear. But I don't know what it is, and especially not when it is. I sincerely doubt you do, either, whatever your speculations on the subject may be. Knowledge is something more than that, and whether you have it or not, I know that I don't.

    But I also know that I don't remotely need such knowledge. The second tick up in the price of anything isn't any less profitable than the first. The fourth isn't any less profitable than the first, second, or third. We don't need omniscience to trade successfully. I don't spend a lot of time chasing unattainable things that I don't need.

    In the meantime, gold is still overpriced and its trend is still down. That is all I need to know to steer clear of it. Silver still has a trend down, but mostly sideways, and is no longer overpriced, being down by a factor of 3 from its highs. Oil still has a trend down, but is down 70% from its craziest peaks, and over 50% from more sustained levels. Either is a better slow accumulate than gold (though personally I think it is still a bit too early for oil, even), and neither has the urgency of momentum anything.

    Bells will ring loudly before anyone has to do anything with any urgency in the gold market. It is currently quiet as a graveyard. Reading tea leaves and spinning imaginary scenarios won't change that. My own bet is that gold goes a lot lower before it reverses. But there will be lots of time even after it reverses, so there is simply no need to guess about why or when.
    Dec 1, 2015. 11:46 AM | Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    The model of receiving an annual 6% dividend, plus or minus 2%, with an occasional thumping 50% loss on the price?

    As for GAAP, the standards exist for a reason, and they warn people away from dangerous situations. If one understands them and understands why they exist, then sensible revisions around the margins are possible and can be reasonable. "Our true economic depreciation is less than our stated depreciation because of X. Our best estimate of true economic depreciation is Y, and you can see that forms half of our ongoing cap ex line item. The rest is organically funded growth, which you can see in the rise in our PP&E account value over time, after correcting for acquisitions, on this chart here." Those would be reasonable and businesslike procedures. "Depreciation doesn't apply to us", "we are worth oodles because cash flow, MLP, woo hoo!" - not reasonable or businesslike. Especially given than KMI is not an MLP to begin with, it is an ordinary C corporation.
    Dec 1, 2015. 10:57 AM | 2 Likes Like |Link to Comment
  • Gold hits five-year lows as investors bail [View news story]
    mmkkgg - not afraid at all, just don't think gold has remotely bottomed yet. I've been averaging silver since $16 earlier this year. Slowly. All for the next cycle, not this one - there is no momentum case for metals whatsoever, right now. There will be months and years to get it right.
    Dec 1, 2015. 10:55 AM | 1 Like Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    PendragonY - I believe generally accepted accounting principles and my own lying eyes. You believe spin from the company trying to support its share price.
    Nov 30, 2015. 07:53 PM | 2 Likes Like |Link to Comment
  • Gold hits five-year lows as investors bail [View news story]
    I wouldn't be interested anywhere above $800 an ounce, and I'd only consider nibbling and slow averaging in at that level. I'd be a buyer at $600 or so an ounce. Gold hasn't unwound half of the crazy unjustified level it hit back in the bubble years. Oil went from $145 to $42, silver from $40 to $14. Take the peak price and divide by 3, in other words. Gold isn't even down half from its nosebleed level.
    Nov 30, 2015. 05:18 PM | 1 Like Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    PendragonY - the arguments at those links is simply pathetic. "Other people do it too" is the most they even try to say. We are to believe that $600 million in annual spending keeps a $41 billion PP&E account ship-shape forever. It's simply nonsense. A very large portion of the stated operating income is return *of* capital, not return *on* capital. How much, we do not know, because the company doesn't even try to tell us, preferring to lie about it trying to goose the share price.

    Does anyone believe you could leave the pipelines alone and let them run for 60 years, and that they would still have as much income producing economic value at the end of that time period as they have today? That is what a cap ex rate that low claims. Which is simply absurd. If, after what they call "sustaining" expenditures only, the pipelines have a useful life of 30 to 35 years, they are understating cap ex business expense requirements by a factor of 3.

    The company's argument is, just as I have stated, the GAAP refuted premise that economic depreciation does not exist. Which is not an argument they can possibly believe or operate on themselves - see the $1 billion per quarter actual rate of capital expenditures. It is just something they want market participants to believe, to support an inflated stock price as they continually sell more shares.
    Nov 30, 2015. 05:12 PM | 1 Like Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    TraderJoeF - funny, I could have sworn the company's claims all over the place are that it is not exposed to the cyclicality of the energy sector, because it is just a utility that is paid to move product and product always has to move, so its revenues should be entirely stable. That was supposedly why it was safe to run at such high leverage, with long term debt fully equal to the entire PP&E account, and with no net quick assets. But suddenly, let there by an actual down year in the industry, and the earnings fall 75%, operating cash falls a lesser 20% or so but still falls, impaired asset charges for half a billion at a time appear on the balance sheet, and the company needs to sell shares even at depressed prices.

    If KMI were financed and run like a cyclical company we wouldn't be having this conversation. It isn't. It should be, yes, that's fair. But to date it hasn't been.
    Nov 30, 2015. 02:01 PM | Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    The fallacy of authority is not committed by appealing to someone who isn't an authority, but by not making any actual argument, or even citing one put forward by someone else, but by simply referring to another's remarks as though they settle anything. The reason it is a fallacy is there are no proper authorities in argument, there are only arguments. Any argument by anyone, must be examined for its soundness, and this cannot be done if the argument is not even stated. And that is all you have done here. When you refer me to google, of all things, you literally refer me to everything everyone has ever said online, which isn't even an authority, let alone an argument.

    State a claim and I can consider it. Duck and evade and pretend, and we all know you don't have anything to say - or you would have said it.
    Nov 30, 2015. 01:28 PM | 2 Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    PendragonY - fallacy of appeal to authority, and the party to the dispute, at that. You need to cite some actual argument with content, not just pretend someone else at some other time said something unspecified.
    Nov 30, 2015. 12:34 PM | 2 Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    There is nothing remotely "discredited" about any of it, and you have never presented the slightest factual argument against a particle of it. Some people can read a balance sheet and understand accounting. That is all.
    Nov 30, 2015. 11:58 AM | 2 Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    Not an argument. Not even an attempt at an argument.
    Nov 30, 2015. 11:25 AM | Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    PendragonY - it is as easy as lying, if you are continually issuing more shares and bonds to suck in more money from the rest of the world. KMI has not distributed cash, net, in ages. It pays its "real" dividend with the "real" money it raises from shareholders - just like Charles Ponzi did. It has debts equal to its entire real property account. The shareholders are paid with their own money - the next in the chain letter - while bondholders pay for the real property. The only test of whether the company can exist without outside cash is actually running for an extended period without outside cash. 2 years would suffice. We'll wait.
    Nov 30, 2015. 10:43 AM | 2 Likes Like |Link to Comment
  • Kinder Morgan: Don't Be Fooled By The Smoke And Mirrors Routine [View article]
    Pendragon - of course KMI has real assets. It is just not at all clear those real assets are as profitable as it claims. Its earnings don't show them as being particularly profitable. And neither does the usual measure, "owner earnings", which adds back positive cash flow (non cash items like depreciation) but then subtracts capital expenditures. That isn't positive enough to support the enterprise value either, because cap ex is quite high.

    The only way the company presents a picture of strong operating "cash flow" is by including depreciation on its large, $41 billion plant property and equipment account, but then not deducting anything for actual capital expenditures. I can make any business in the world look profitable if I count all receipts as income and just ignore all the expenses needed to get those receipts. It's a hopelessly arbitrary and completely made up number.

    The management tries to pretend that isn't what it is doing by recording a tiny "necessary maintenance cap ex" line item excluded from cash flow. But that item is only 1.5% of its PP&E account. Its actual cap ex runs more like 10% of its PP&E account. We know from common sense and business practice that there is no way a 1.5% annual contribution can truly sustain $41 billion worth of plant and equipment in an unimpaired operating state. Nuclear power plants don't depreciate that slowly. We don't know whether *any* of the 10% of PP&E cap ex is actually growing the business, it might easily *all* be necessary just to sustain their economic position.

    The truth may lie somewhere in between. But the only way we will ever find out is by the company actually running its operations out of *internally generated cash*. If it can do that and still has cash flow left to pay the dividend, then the dividend becomes real. But if it can't - if it has to sell shares and borrow continually to pay a dividend at all, or to keep the plant running - then it simply isn't profitable enough to be paying out what it is paying out today.

    So the question back to you is, do you understand what true economic capital expenditures are? Whatever is needed to actually sustain the level of revenue a given set of plant requires, whether capitalized or not, is a true business expense. Expense, as it not earnings, as in not profit, as in not available to be paid out to shareholders, as in the business crashes and burns if they are not paid.

    There is a reason GAAP accounting invented the idea of depreciation, you see. They weren't making things up trying to make it harder to understand what businesses earn. When you pay a lump sum up front for something that produces cash flows over 10 years and is then useless, you have to count the first 10% of its price coming back each year as just return of your capital, not actual profit. If you have to pay 10% of the original price each year to keep the plant running, the same applies. Depreciation is the non cash expense that records this fact; cap ex that is actually a business expense and not an investment expanding the operation is the true cash charge that records the outgo, ahead of distributable cash.

    Sound companies and sound investment practices that want to use cash flow measures therefore deduct cap ex or the portion of it required to keep the business going, whenever they add back depreciation. One or the other real charge is absolutely required, or the entire picture of the business is falsified.

    KMI systematically falsifies the entire picture of its business, in the measures that it urges its shareholders to use, in the utterly inadequate cap ex it calls maintenance cap ex, and in its continual issuance of new securities to fund operating expenses and dividends. It does so purely to goose the price of its securities, because selling more of its securities at fancy prices is its actual business model. The whole operation is built around rubes not understanding accounting for capital intensive businesses.

    Which may fool some of the people some of the time, but can't fool all of the people all of the time. Welcome to one of the times when it isn't fooling all of us. Why now? Because the explanation that all of the cap ex line is truly growing the business rings rather hollow when operating cash flow drops by double digits instead of growing. People notice that its PP&E only grows from selling securities when 10% of PP&E supposedly reinvested doesn't grow its operating cash flow. People notice that the company is critically "hooked" on new outside cash infusions when it agrees to pay 9.5% yields and 2% discounts on convertible preferred stock issues.

    In short, the wheels are coming off, and people are noticing how flimsy the evidence is that KMI's core operations are actually even half as profitable as the company pretends. Reclassify half of the cap ex expense line as necessary economic cap ex to be excluded from owner earnings, and a much more realistic picture emerges. One in which the company has to pay 5 or 6% of the PP&E account total to truly sustain its market position. Not 1.5%.
    Nov 30, 2015. 09:27 AM | 2 Likes Like |Link to Comment