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When you buy KMR, you're buying KMP, with what is essentially a built-in dividend reinvestment plan. [1] The distribution to KMR shareholders is paid in the form of additional KMR shares. The distribution is calculated by dividing the cash distribution to KMP unit holders by KMR’s average closing price for the 10 trading days prior to KMR’s ex-dividend date. [2] One of the reasons KMR sells at a discount to the partnership is because KMR pays shares based on the price before the ex-dividend date. The KMR dividend is equal to the KMP cash distribution, but paid in additional shares. If you accepted the dividends in cash, your reinvestment plan will be forced to reinvest after the ex-dividend date, gaining more shares.
Sumflow 21:57, December 19, 2011 (PST)
The three Kinder Morgan companies (Kinder Morgan Partners (KMP), Kinder Morgan incorporated (KMI), and the Kinder Morgan management company (KMR), own the same assets: 38,000 miles of natural gas and product pipelines, and 180 terminals. [3] The only cash flow that the management company (KMR), gets is from its ownership of Kinder partners (KMP) shares. Investors in the management company (KMR), do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for Kinder partners (KMP) and the management company (KMR), are equal; the only difference is that KMR distributions are paid in the form of additional shares, reducing the need for the Kinder partners (KMP) to raise public equity, or borrow funds.
The corporation (KMI), is buying El Paso pipeline partners (EP), which owns and operates natural gas transportation pipelines and storage assets. The El Paso transaction is expected to be nicely accretive to dividends of all three companies. [4] The corporation’s (KMI) growth, is driven by Kinder partners (KMP), which currently accounts for approximately 98 percent of the distributions that the corporation (KMI) receives. The corporation (KMI) can then drop down some of the El Paso assets to Kinder partners (KMP). The cash from sales to the Kinder partners (KMP) will be used to reduce the leverage used to buy El Paso in the first place. Some of El Paso’s assets will also be sold as cash, or spun off into a separate company and sold. But the assets are so widely spread out geographically that a spin-off is less likely.
The Partners (KMP) has to pay out all of there earnings. So the only way any MLP can get cash is to borrow it, or sell something. Kinder partners (KMP) have to get the cash up to pay dividends anyway. Some they pay to the corporation (KMI) who pays the funds out to shareholders. Rather than receiving and distributing cash, the management company KMR, receives and passes through a dividend in shares known as paid-in-kind distributions. Kinder partners (KMP) the cash that would have been paid out as dividends, to buy assets from the corporation (KMI) and finance acquisitions internally. Over $490 million of the equity required for this investment program is expected to be funded by the management company’s (KMR) dividends. [5]
One of the reasons the management company (KMR) sells at a discount to the partnership is because the management company (KMR) pays dividends in shares based on the management company’s (KMR) average closing price for the 10 trading days prior to the management company’s (KMR) ex-dividend date. [6] But when you reinvest a cash dividend you buy at the ex-dividend price.
“KMP’s stable and diversified assets continue to grow and produce incremental cash flow in virtually all types of market conditions. We see exceptional growth opportunities in the midstream energy sector, particularly in the natural gas shale plays and in the coal export business.” ~ Chairman and CEO Richard D. Kinder [7]
“Kinder has made a low-return, humdrum business into a river of money.” ~ Robin West, consulting firm PFC Energy. [8]
Sumflow 03:15, December 20, 2011 (PST)
The shares of KMR often trade at a discount to the partnership (KMP) just as a closed-end fund might trade at a discount to its net asset value. KMR shares often trade at what looks to be irrational prices because secondary market prices are often very much out of line with underlying portfolio value. Cash now is worth more than cash in the future.
The ability to buy at a discount is a key benefit of buying KMR instead of the partnership (KMP) for capital accumulation. If held for a long period of time, the price may eventually return to the price of the partnership (KMP). This price increase, combined with share distributions, can provide a return higher than the partnership (KMP) over the same period of time.
Brokers have less reason to promote a stock like KMR that can be bought once and not offer additional income in the form of commissions from dividend reinvestments. If a client invests in KMR long term the funds are pretty much gone as a source of commissions. With the partnership (KMP) advisers and planners have funds coming in every quarter that they can redirect and generate additional commissions.
Sumflow 23:35, December 21, 2011 (PST)
The shares of KMR often trade at a discount to the partnership (KMP) just as a closed-end fund might trade at a discount to its net asset value. KMR shares often trade at what looks to be irrational prices because secondary market prices are often very much out of line with underlying portfolio value. Cash now is worth more than cash in the future.
The ability to buy at a discount is a key benefit of buying KMR instead of the partnership (KMP) for capital accumulation. If held for a long period of time, the price may eventually return to the price of the partnership (KMP). This price increase, combined with share distributions, can provide a return higher than the partnership (KMP) over the same period of time.
Brokers have less reason to promote a stock like KMR that can be bought once and not offer additional income in the form of commissions from dividend reinvestments. If a client invests in KMR long term the funds are pretty much gone as a source of commissions. With the partnership (KMP) advisers and planners have funds coming in every quarter that they can redirect and generate additional commissions.
Sumflow 23:36, December 21, 2011 (PST)
Midstream Two-Step
The corporation (KMI), is buying El Paso corporation (EP), which owns and operates natural gas transportation pipelines and storage assets. El Paso Corporation (EP) is a natural gas company involved in oil and natural gas production and natural gas transportation. EL Paso owns the largest interstate gas pipeline system in the U.S., and is responsible for transporting a quarter of all the natural gas used in the country every day. [9]
Generally the general partner (KMI) buys a corporation with lots of pipeline assets. Then the corporation sells the assets to its own master limited partnerships (KMP and EPB). The drop-downs move the pipelines to a more tax-efficient partnership structure, and are priced at a level that guarantees cash flow accretion for the partnerships. The corporation takes the proceeds from the asset sale and pays down its acquisition debt, with a goal of holding zero parent-level debt upon completion of asset drop-downs. It works as long as a general partner doesn't pay more for assets than it can charge its partnerships and still have the drop-down be cash flow accretive. [10]
Sumflow 23:26, December 23, 2011 (PST)
Midstream Two-Step
The corporation (KMI), is buying El Paso corporation (EP), which owns and operates natural gas transportation pipelines and storage assets. El Paso Corporation (EP) is a natural gas company involved in oil and natural gas production and natural gas transportation. EL Paso owns the largest interstate gas pipeline system in the U.S., and is responsible for transporting a quarter of all the natural gas used in the country every day. [11]
Generally the general partner (KMI) buys a corporation with lots of pipeline assets. Then the corporation sells the assets to its own master limited partnerships (KMP and EPB). The drop-downs move the pipelines to a more tax-efficient partnership structure, and are priced at a level that guarantees cash flow accretion for the partnerships. The corporation takes the proceeds from the asset sale and pays down its acquisition debt, with a goal of holding zero parent-level debt upon completion of asset drop-downs. It works as long as a general partner doesn't pay more for assets than it can charge its partnerships and still have the drop-down be cash flow accretive. [12]
Sumflow 23:27, December 23, 2011 (PST)
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