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# Crosstex Energy Inc. Message Board

• rrb1981 rrb1981 Dec 21, 2005 1:00 PM Flag

## Equity Cost of Capital

True cost of equity capital for XTEX is 7.5% Ask geoequities how I arrived at this rate.

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• Thought I would go ahead and explain the equity cost of capital for XTEX and why it is not 14% like geoequities implied. XTEX/XTXI are indeed in the 50/50 splits, however, this does not mean that all cash is split 50/50, it means the accretive cash is split 50/50. For example, right now, XTEX is selling for roughly \$34/unit. The distribution is \$1.96, for a yield of roughly 5.75%. However, the true cost is higher as the GP take must be factored in. The current GP take, on a per unit basis, is roughly .60/unit. This means that the true yield (cost) is closer to 7.5%, far from 14%. Also keep in mind that while XTEX is in the 50/50 splits, it has one of the lowest yields of all of the MLP's, a feature that helps compensate for the fact that they are in the 50/50 splits.

(1) current GP take per LP unit = \$.152. Add it to the \$.49 and you get \$.64, not \$.60.

Note: GP "tax" is 31%.

(2) assume XTEX distribution grows to \$.75/Q = \$3 annual. At 7% yield, XTEX = \$45/share. GP tax = 55%. Cost of equity = 10.33%.

If you doubt it, do the math.

Current low yield factors the next 2 year growth. I agreed that this is a given. But in 2-3 years with a cost of equity in the 10+% how will they be able to finance growth at the same rate? Hence the multiples will drop, hence higher cost of capital.

• Here's how you arrived at that:

(\$.49 + \$.152)*4 / \$34 = 7.5%

Going forward, however, things become increasingly more difficult.

• The cost of capital indeed goes up, but one need only look at KMP to see that it is possible to continue well into the 50/50 splits. Besides, XTXI has several mega size organic projects that will come online at ultra low multiples. The Barnett Shale pipeline will come online in January or February, the El Paso deal will bring a host of expansion, interconnect projects, they have the North LIG deal and potentially the South Louisiana deal. The Barnett Shale expansion is earmarked at 15 million, with a cashflow number of 17 million for a multiple of less than 1. Keep in mind that the original project was a 100 million dollar deal with a cash flow run rate number of 17.5 million for a multiple of 5.71. Together, that would be a multiple of about 3.4x. Crosstex has the advantage of still being small and in the 50/50 splits, that small deals can still move the distribution. It all depends on the multiple paid.

• Dear Beerman, change 2007 with 2006. It does not change the argument, which is very simple:

* all the wonderful things that the management promises will happen and the share price may still not move all that dramatically.

What's your take on this thesis?

Also, it may be that with more projects they can push the divvy to \$4/share. What will it mean in terms of share price? What's your model and what is it founded on? A simple extrapolation of today's multiples into forever? If you can borrow \$65K at 4.5% today, would you invest it in XTXI? What's your hoped for return?

• Here is my thesis: management will do what it says it will do.

By the end of year 2006, \$3 dividend. By the end of year 2007, \$4 dividend. By the end of year 2008, \$5. Dividend. I think these objectives are doable and perhaps conservative.

I do not know what kind of multiple I will get in 2006, 2007 or 2008. However, if I am getting over \$5 in dividends by then, I will take my chances. I would predict that the stock will double by that time.

If management does not deliver or misleads me, I will sell. I believe the end game for many of these MLP/Gps will be to be acquired and it would not surprise me if XTXI/XTEX or CPNO were acquired.

For what its worth, I own XTXI, CPNO and ETP.

Are you the same guy who used to post as geo_investor?

• Since I define "GP tax", can we agree to use my own calculation? And it doesn't change the actual numbers, which I give.

"fuzzy math", "laughable", "operator not fine" and such crap. Still hurting from my pounding on the MWP board? Is this all you can put forward in terms of insults and is that how you back them up? Grow up, you're getting unraveled.

• Pounding, I believe i had more rec's on the message board than you? And no, I don't log in under multiple identities and give myself rec's.

Your GP tax, as you call it, is more a ratio of the amount the GP receives divided by the amount the LP receives. Using the total amount of cash paid out is the correct thing to do, because the denominator is essentially the distributable cash number that they quote. The numerator could be one of two numbers, either the amount that the GP gets, or the amount that the LP receives.

If you dig into KMI/KMP on an absolute bsais, and it is very messy due to KMR, but even on an individual unit basis, KMI(through its GP ownership) is receiving around 40%-44% of the total cash. This may not seem like a big deal, but if you look at where the 50/50 splits are at, and then look at the current distribution, it is simply breathetaking. It makes you realize Kinder is a genius. He and Duncan saw this long before anyone else (ok, the Buckeye guys but they never used BPL as a growth vehicle until the Carlyle guys came along). I have GP split speadsheet tables built for just about every MLP and GP and I use them to calculate the GP take on a per unit basis and on an absolute basis(just multiple by number of outstanding units) and will have to see if I can pull it up. Don't want to guess at how far past the 50/50 entering point he is, but he has gone very far. Will see if I can find it.

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