Smackdown

MLPs: GP / LP Relationship Is Key

Elliott,

I did some more research and you indeed are correct. (tail between legs). UBTI is combined for a $1000 total. However, you do get to deduct depreciation and other expenses against it. Furthermore, there is a very good case to be made to allow netting gains and losses from one MLP to another, as long as 469 (k) limitiations do not apply. If this is true, then this would be a very good thing. Netting passive losses against the UBTI.......

More coming!!

Keep up the good work btw.

MLPs: GP / LP Relationship Is Key

I just got off the phone with investor relations of a large MLP. They indeed confirmed that I am correct and that the UBTI does not net out across multiple holdings. It is MLP specific. For example, you own 10 MLPS in an IRA that each have $900 in UBTI. It is not added up. No tax is due.

Hope this helps.

MLPs: GP / LP Relationship Is Key

We need to further explore the UBTI issue..... This from the recent NAPTP conference in September. Please note the part about UBTI being calculated on a per partnership basis. Based on my extensive experience in the sector, and with historical IRA UBTI due, I agree that it must be per partnership. Let's keep this friendly since we are on the same side!!

"b) Tim Fenn (a tax lawyer specializing in MLPs) of Vinson Elkins stated the following on UBTI (I hope I heard these right):

> filing of the 990T is the trustee's responsibility, as has been speculated on this board

> there is some confusion about the $1,000 UBTI limit for IRAs...you would only OWE TAX on $1,000 or more of NET UBTI, but the trustee is supposed to file on GROSS UBTI of $1,000...so there are some things apparently that can be netted against the GROSS UBTI so just because there is a filing doesn't mean you owe money; marginal tax rates for UBTI in IRAs start at 15% today; UBTI is calculated per partnership, and is not to be 'netted out' across multiple MLPs"

MLPs: GP / LP Relationship Is Key

Elliott, I have to strongly disagree with you. UBTI is seldom an issue in IRA accounts. Most MLPs do not generate enough UBTI to cause an issue. I do believe the $1000 limit is per MLP and not cumulative. In addition, UBTI is not the distribution as many incorrectly assume. In conclusion, the IRA trustee is responsible for the UBTI excise if any so it is not the investors concern.

Your second point is totally off the mark. A good investment is a good investment. Period. Alerian MLP index is up almost sevenfold in 13 years. If I avoided MLPS in IRA accounts because they are "not suitable due to some tax advantage", I pissed away one of the best sector opportunities, bar none. The tax advantage is icing and not any reason to avoid them.

Question... Which would you buy in an IRA if limited to these two choices. 1 year corporate investment grade paper at 1.4% or 1 year muni paper with higher ratings and 1.5%? Even though the muni is tax free, it still nets more. For the record, I would not buy either, but you get the point.... ;)


On Oct 21 03:41 PM Elliott Gue wrote:

> Yes, generally you are better owning MLPs in a taxable account. One
> reason is UBTI, the other is simply it's best not to put a tax-advantaged
> investment in a tax-free account as you lose the benefit.
>
>

MLPs: GP / LP Relationship Is Key

EPB has a very compelling story. GP is El Paso. They have a couple billion in carry forward losses and billions in drop down worthy assets. Makes for a perfect scenario. EPB just crossed into the 15% IDR split with the recent impressive distribution hike. With its expansion plans and the aggressive distribution plans, I would not be surprised to see them quickly surpass the 25% threshold and shoot for the 50% mark. Plus the business is the most stable type of FERC regulated assets in any MLP.

Good explanation Elliott! I hold your commentaries in a league above the usual misinformed and unprofessional Seeking Alpha blather regarding MLPs.

Answers to Recent Questions: Taxes, K-1s, MLPs, and Why These 7 Pipeline Companies

EEQ.


On Sep 21 03:34 PM Chancer wrote:

> If you own a pipeline MLP like KMR, you receive quarterly distributions
> in stock.
>
> Your average cost (tax basis) declines every quarter with additional
> shares.
>
> There is no K-1 to hassle with.
>
> If you need cash, you can sell shares. Taxes will be capital gains
> (which can be offset with tax losses).
>
> I only wish their were more MLPs that paid in stock like KMR.
>
>
>
>
>

Answers to Recent Questions: Taxes, K-1s, MLPs, and Why These 7 Pipeline Companies

One thing about 100% FERC regulated pipelines, like BWP or EPB, and Roth IRAs. These two MLPs are inelegible for ROTH investing. The companies are required to prove to the FERC that they pay tax. IRA investments are OK as tax is due at some point. However, in a ROTH, all tax is avoided. You cannot buy BWP or EPB in a ROTH. There is actually a letter in with the K1 explaining this.

On another note, I do like BWP as well.

Master Limited Partnerships for Your Portfolio: Three Key Questions and Answers

About time somebody posted a nice MLP article full of accuracies and with no bullshit or overhyped paranoia. Good job. Only fault was missing EEQ (as mentioned above). KMR and EEQ are the same LLC structure, set up to avoid K1s.

Long all kinds of names, added a boatload at the bottom. On margin none the less (currently took the leveraged profit).... Laughed while the Seeking Alpha idiots were busy trying to short the already imploded market using leveraged ETFs and while they bought $1000 gold with no yield. Tried to tell them to look at MLPs and also bank preferreds at 30-40 cents on a dollar (some up 200%).

Kinder Morgan's Dividend Payout Rate Is Unsustainable

Excerpted from www.bullmarket.com/dig...

How can MLPs pay out higher dividends than their earnings?

The answer to this question has to do with the way that depreciation and, in the case of natural resource producers, depletion expenses are treated. Depreciation and depletion expenses are a means of assigning the cost of a long-term asset, such as a pipeline or natural resources, over its useful life. These items are called "non-cash" expenses because cash is not actually being paid out for the depreciation or depletion of the long-term asset. A typical corporation must reinvest a substantial portion of its cash flow in order to replace its equipment, keep pace with technology, remain competitive, and/or expand its business. After these payments are made, any remaining cash flow can be paid out to shareholders in the form of dividends.
MLP assets, such as pipelines, however, are generally long-lived; require very little maintenance; and are not subject to major technological changes or physical deterioration. It is for these reasons that an MLP can pay out a very high level of its cash flow to unitholders without hurting the long-term basic earnings power of the business. This is also why investors should value MLPs based off metrics related to distributable cash flow (DCF) and not earnings.

What is Distributable Cash Flow (DCF) and why is it a better way to value MLPs than earnings and P/E ratios?

DCF is the cash flow available to the partnership to pay distributions to LP unitholders and the GP. While calculations can vary slightly between companies, it is basically adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) with interest expenses, taxes, and maintenance capital added back in. Maintenance capital is added back in because that is the part of a company's CapEx (capital expenditure) budget that is needed to sustain current operations and cash flow, while growth capital (the other component of CapEx) is used to expand operations and increase cash flow.
Since DCF strips out all non-cash items, it is a truer measure of how much cash an MLP is generating and whether it can continue to pay out or increase its dividend. Thus, DCF-based metrics are better measures to use in the valuation of MLPs compared to earnings-based measures, which include non-cash items.

What is a coverage ratio and why is it important?

The coverage ratio is basically an MLP's distributable cash flow available to common unitholders divided by the distribution paid out to common unitholders. It is important because it illustrates the cushion an MLP has to pay its dividends. Typically, MLPs that are more energy (natural gas processors) or weather sensitive (propane marketers) carry higher coverage ratios than companies with higher fee-based businesses. Companies with higher coverage ratios have more flexibility to grow the business without taking on more debt and/or raising the current dividend.

Why is Debt/EBITDA an important metric to be aware of?

One common criterion for debt covenants is a company's debt/EBITDA level. If the level is too high, it could make a debt default more likely. Also, it shows how leveraged an MLP currently is. The less leverage an MLP has, the more flexibility it has to lever up and expand

Kinder Morgan's Dividend Payout Rate Is Unsustainable

Paul,

I apologize for my insulting tone. I was steamed that such an inaccurate article was posted and that it could effect peoples understanding of the already misunderstood (even by yourself) sector. Misinformation helps nobody. It hurts. It is nicely altruistic to try and help the community, but not with falsehoods and inaccuracies.

I applaud your desire to grow and improve. No hard feelings...

Good luck.


On Jul 28 12:24 PM Paul Zimbardo wrote:

To
> those who chose to merely insult me for a) contributing to the community
> and b) trying to help other investors; that is your prerogative.
> I welcome constructive criticism and comments as that is the only
> way that we will all learn and grow

Kinder Morgan's Dividend Payout Rate Is Unsustainable

Paul,

You can spin this however you want, and I do appreciate your slight bit of humility here, but you were dead nuts mistaken in your analysis. Man up and admit the whole article is flawed. It must be tough to spend the time and effort you put into this and find out it was a colossal mistake. For the record, S&P is the worst source for MLP research. Not the primer that you linked but the sell side analyst, T. Shafi. Look at Shafi's track record of tragets and recommendations. Read what they write. They make the exact same mistake as you. It is a joke. MLPs like KMP/KMR float debt or issue stock to pay for their expansion projects. These projects accrete to their DCF. Modest leverage with MLPs is not a bad thing as the assets that were leveraged are midstream assets in are monopolistic. The MLPs will not commit to an expansion without firm committments. This reduces the risk.

For the record, Kinder Morgan is not one of my biggest holdings, nor am I a buyer at these levels. However, your article needed a firm rebuttle as it was so egregiously erroneous in its facts. There is no debate as you put it. You stated in black and white how dangerous KMP's distribution is based on lack of EPS coverage. This is wrong and there is no discussion. DCF is the metric. DCF. EPS is a hugely minor secondary metric that has had little impact in the 17 years I have been in the space. It is what it is.....

Please read this research piece by Bullmarket. It covers some basic points. www.bullmarket.com/dig...

On Jul 28 12:24 PM Paul Zimbardo wrote:

> Looks like I have sparked some debate which is always a good sign.
> Thank you for the positive feedback and constructive criticism. To
> those who chose to merely insult me for a) contributing to the community
> and b) trying to help other investors; that is your prerogative.
> I welcome constructive criticism and comments as that is the only
> way that we will all learn and grow. As always, make sure that you
> understand and are comfortable with any investment that you choose
> to make. While I typically like to respond to each comment individually,
> due to the overwhelming number of comments I will use a more general
> approach to responding.
>
> First I would like to point out that I am familiar with Master Limited
> Partnerships; however, I have not analyzed any of these vehicles
> in the past. In retrospect I should have explained MLPs a little
> more thoroughly and stated why I believe the payout rate is unsustainable.
> I hope to do so in my comments. My primary source for research on
> MLPs is S&P, specifically the website below:
>
> www2.standardandpoors....
>
>
> First, I understand that they are really distributions rather than
> dividends and units rather than shares but the points I made are
> the same. I would also like to address the common misconception that
> MLPs must “pay out at least 90% of its distributable cash flow” as
> Mr. (or Mrs.) Sitting Duck and others mentioned in his/her comment.
>
>
> In reality, MLPs “must GENERATE at least 90% of its income from qualified
> sources” and there is no requirement about distributions. In return
> for meeting this requirement, MLPs receive beneficial tax treatment
> (in sum, the MLP does not pay income taxes and instead each partner
> pays based upon their ownership stake, similar to an S-Corp). Based
> upon this critical distinction, MLPs yield is based on earnings just
> as much as it is upon cash flows. As you can see from KMP’s financials,
> revenues and cash flows have been steadily declining. No magically
> operating structure can permit this type of company to continue growing
> its earnings at its historic rate with these fundamentals.
>
> This was the point that I was trying to stress: you need to analyze
> BOTH cash flows and earnings when investing in MLPs as there is no
> minimum cash flow payout requirement.
>
> I am quite surprised at the number of comments that say that believe
> that MLPs have to payout 90% of their cash flows, what that is certainly
> not the case. Judging from the “+10” rating at the time of my writing
> this on Sitting Duck’s comment, I am forced to believe that this
> is the prevailing misconception among our community. At the very
> least, my article helped to correct a misconception. Maybe as I follow-up
> article I will write about MLPs in general, specifically: 1. What
> they are; 2. What the requirements are for this treatment are; 3.
> Benefits to this treatment; and 4. Disadvantages to this treatment.
> Thoughts?
>
> You cannot ignore the underlying fundamentals of the company: revenue
> is falling, debt is rising, and the company is paying out more in
> dividends than it can afford to based upon its cash from continuing
> operations and used for investing activities (specifically, CapEx).
> Just look at the issuance of debt the past few years alone would
> have be alarmed if I were an investor.
>
> In regards to Penn West, yes, every investment can “cut both ways”
> as for everytime someone sells, someone else is buying.
>
> @djj420 I have no intentions of investing in KMP and it would be
> unethical for me to not disclose if I had intentions of investing
> in a company that I write about.
>
> In closing, even if you still disagree with my analysis of MLPs or
> application of my framework to KMP, hopefully you can still appreciate
> my effort and use this framework when analyzing other high yield
> stocks. If I was able to help at least one other person (thanks Milt!),
> I believe my work was worth the effort. In the end, this will only
> help to make me a better writer and analyst.

Avoid Banks' Common Shares; Opt for Preferreds, Minibonds

RiskTrade, you have your facts very wrong. Trust preferreds and Enhanced Trust preferreds are debt on the books and are senior to both the regular equity preferreds and the TARP. They also have cumulative dividend features. I loaded the truck up on these many months ago. I got as much as 30% yields and many have more than doubled. How is that for risk/reward??? So, I beg to differ. In addition, back then, some of the regular preferreds were trading at levels lower than the common!! Preferred was a home run buy then.

Now, I am much more selective. Less preferreds, more MLPs. The days of fish in the barrel are behind us and those that snoozed, lost out on one of the greatest money making opportunities of our lifetime.


On Jul 27 07:43 AM RiskTrade wrote:

> Pointless Article. Buying pref rather then common makes little sense.
> Buying pref only caps your upside while really exposing you to the
> same risk as common. In a default pref holders and common holders
> both get nothing. Whats worse is that bank pref suffers from the
> risk of forced conversion to common. Further pref usually involves
> liquidity risk relative to the common. Also from a relative value
> perpsective it makes more sense to buy the sub debt rather then the
> pref.

Groundbreaking WSJ Story on Gold

Exactly. While Seeking Alpha gold idiots have been tying their capital up in an asset that does nothing for them, I have made 50-150% in MLPs and Bank Preferreds. I have publically posted several ideas here. And, I collect double digit interest and distributions on my investments. My distributions pay my bills. All of them. Point is that gold has no real return. None. Zilch. In fact, you lose money while you own it (unless it appreciates....maybe). It is lower in the last 30 years though. Good luck!




On Jul 13 02:33 PM cyclingscholar wrote:

> Gold bugs are such MORONS.....
>
> "I don't know where Mr. Condon gets his data, but if I go back 40
> years, I find gold at about $40 an ounce versus $917 today - an annual
> gain of 11 percent. As for the S&P 500, its average 1969 value
> is right around 100, which, when compared to today's 885 level produces
> an annual gain of about 7.5 percent.".......
>
> Well, feces head, if I go back 30 years I find gold at $1000 an ounce
> in the Carter/Early Reagan years...vs $970 today, for an annual loss
> of...well, you get the point!
>
> Pick whatever time period fits your analysis. Schlock statistics
> by a schlock analyst.

MLPs: Mid-Year Review

That would be KMP to KMR.... Typo.

EEQ pays stock dividends at a $3.96 a share level. Stock is around 35.


On Jul 07 09:11 AM Smackdown wrote:

> EEQ - Enbridge Energy LLC. Same relationship to EEP - Enbridge Energy
> LP that KMP and MKR have.
>
> Also, even though DEP - Duncan Energy LP has a K1, I'd be backing
> up the truck at 16.

MLPs: Mid-Year Review

EEQ - Enbridge Energy LLC. Same relationship to EEP - Enbridge Energy LP that KMP and MKR have.

Also, even though DEP - Duncan Energy LP has a K1, I'd be backing up the truck at 16.


On Jul 01 03:11 PM Chancer wrote:

> I have owned KMR for several years. I like the stock dividend, as
> I do not have to pay taxes (until I sell), and my tax cost basis
> goes down every time I receive more stock dividends.
>
> I wish I could find many other good stocks that pay dividends in
> stock. There do not seem to be many.