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Kinder Morgan Energy Partners Message Board

  • rajeevvohra rajeevvohra May 16, 2012 3:50 PM Flag

    KMP vs KMR

    I bought KMR and its down when KMP is up today. Aren't these supposed to trade at the same value ? Any explanations ?

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    • markramey May 28, 2012 3:28 PM Flag

      The CFO says that KMR IS KMP and that the stock should probably trade at a premium. But KMR pays in additional shares as would a DRIP and not in cash like KMP.

    • maybe I'm slow, but KMP as a partnership, is not taxed at the company level on its earnings (partners are responsible for the income taxes on its taxable earnings) whereas KMR, has elected with the IRS to be treated like a C-Corp and is therefore taxed on its earnings notwithstanding that it is an LLC. This being the case, I don't see how KMR can trade over the long term at the same level as KMP although the CEO of Kinder Morgan says they should be at the same level.

      • 4 Replies to bluedeviltoo2002
      • <<whereas KMR, has elected with the IRS to be treated like a C-Corp>>

        You know, the C-corp for KMR is somewhat of a "Well, we have to pick some form of corporate structure, lets take C." I view it as an odd artifact that really will yield no information by delving in deeper.

        KMR owners receive additional shares of KMR instead of a cash distribution. The lack of any cash distribution or qualified dividend distribution leaves KMR in sort of a narrow, odd corner of the investment world.

        So, compare the yield of KMP, about 6.36% and KMR, about 6.80% and make your choice. Decide if you want to hire a tax accountant to deal with the KMP K1s or just do noting with KMR. I think the investment choice is clear.

      • KMR is a corporation, so normally it pays taxes on its taxable income. BUT - the units it owns in KMP are special i-units; these i-units do not get allocated any taxable income by KMP and they are not entitled to any cash distributions from KMP, so KMR has no current tax liability. Instead, the i-units are entitled to additional i-units issued by KMP in an amount (approximately) equal to the cash distribution paid on the regular KMP units.

        So KMR accrues, but does not pay, a corporate tax on some portion of KMP's earnings. So far, it has accrued $ 225 million in these deferred taxes, which it does not ever intend to pay.

        And as a history lesson, a long time ago holders of KMR had the right to exchange their KMR shares for KMP units on a one-for-one basis. This exchange right kept the values of KMR and KMP pretty close. In fact, for a while, KMR used to trade at a premium to KMP. But the exchange right was given up by KMR shareholders a long time ago.

      • IIRC KMR's whole existence is to own shares of KMP, so when KMR receives distribution from the KMP shares they own, they simply buy more shares of KMP and issue equivalent, additional shares of KMR to the existing KMR share holders.

        If you look at KMP as a holding and fully re-invest the distribution, essentially you will never get to a zero balance, thus KMR will avoid federal taxes.

        Clearly I'm not an authority on this structure but it's what I've understood it to be. I am an owner of KMR stock, and a previous owner of KMP stock. Sold the KMP when the discount of KMR was favorable and I do like avoiding the K1 and taking advantage of LTCG when I do sell KMR.

    • I meant that KMP was up for the day (like 50c) and KMR was down (70c)

    • KMR is $70.71.
      KMP is $80.

      How did you miss the $10 difference in value?