Before you consider a long or short position on KMR or any other MLP, I suggest you go to the following site - http://www.naptp.org (this site will provide information on the structure of partnerships like KMR/KMP. Specifically refer to PTP 101 section and "primers". This information may help.
Generally, an interest in KMR is a Limited Partner interest, as opposed to a shareholder interest in a corporation. A shareholder interest is pure equity, while a limited patner in KMR is a Unit Holder with limited rights. The General Partner owns the "pure equity", while the limited partner Unit Holders own a type of hybrid security (partially debt and partially equity - perhaps like a "participating preferred"). Limited partners are paid in accordance with the partnership agreement from Distributable Cash Flow.
From the General Partner point of view, payments to KMR Unit Holders are similar to debt payments since Unit Holders are paid first, and the General Partner (Knight) is paid after payments to Unit Holders.
sooner: what is the normal % spread between KMP &KMR. when kmr is the best buy. 4.25 diff rite now gives you over 1% higher divy. My question has the spread been wider giving more than 1 or 1.25 % higher divy
I have owned both KMP and KMR, continuously since 2002 and in the 1990's (but I have lost the 1990's records). I now own MLP's for the income; I am semi-retired and I use the distributions to "go to the grocery store".
Currently, I have a slight preverence for KMR (I own KMR and I do not currently own any KMP).
KMP pays a cash distribution and issues a K-1 annually. KMR pays a stock distribution (technically for tax purposes it is a stock split), and does not issue a K-1 annually.
KMR advantages -
- At the current Unit market prices the yield on KMR is substantially higher (KMR $1.05/$43.47 = 9.66%; KMP $1.05/$49.55 = 8.48%).
- KMR ownership means no K-1 to deal with annually; this advantage is largely offset by adjusting tax basis each quarter with the receipt of stock distribution (split).
- I plan to sell approx the distribution shares each quarter (again this is done in order to be able to go to the grocery store). This will generate a gain/loss on sale, again offsetting the advantage of no K-1.
- There is some risk of a modest reduction in the yield advantage due to the fact the sales price formula may be unfavorable, although this quarter it appears to be slightly favorable (I will find out tomorrow - Feb 2, 2009). However, the overall yield advantage will remain significantly favorable - this is my primary reason for favoring KMR over KMP currently.
KMR was designed for IRAs - distributions are considered a non-taxable event. When you sell in a taxable accct, all gain is considered CG (long or short depending on holding period). No K-1, no 1099, no tax reporting.