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Kinder Morgan Energy Partners, L.P. Message Board

enronbuddy 17 posts  |  Last Activity: Aug 17, 2012 8:28 PM Member since: May 10, 2012
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  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 17, 2012 8:28 PM Flag

    Look…without a doubt…a pipeline can be made to last more than 40 years…. You may have not caught this part in my initial post
    “….if you think these already aging pipelines are still going to be around in 25 years…without a significant capital infusion”

    The mistake you, and a lot of people seem to be making is mingling the cash flows from future capex with cash flows with the initial investment…and then ignoring the cost of both. Right now…we, or at least I…am only talking about this 6.2B dropdown. I can understand how this might be confusing, but when evaluating capital projects, you must identify and segregate cash flows and assign them properly to the capital expenditures that produced them.
    So let’s think about this 6.2 B purchase as a single project….I am exchanging 6.2B in cash today…that is -6.2B…for future cash flows of around $246M a year. Lets say that after 10 years…I start needing to do some more aggressive maintenance to stay ahead of the curve. Pumps need to be replaced, maybe I need to cut out and repair some damaged portions at the rate of $100M per year above the initial run rate. Not to worry…the GP just puts these costs in the “expansion” capital bucket and thoughtfully excludes that from the DCF calculation…thus increasing both his payout, and your payout. Of course…it has to be paid for…so $50M of shares and debt are issued, and voila…DCF is maintained.
    However….if you are an honest analyst…you have to recognize that part of your DCF…still 246M now rightfully belongs with your expansion capital project…the 100M….not the original 6.2B of project capital. So while I have managed to keep my pipeline going, and through some creative accounting maintained my DCF…the cash flow attributable to the El Paso dropdown continues to decrease as more and more of that cash flow…even if stable is attributable to additional capital expenditures…each which need to be examined in their own right. It is simply bad analysis to include the benefits of future capital projects…yet ignore those costs…This is the same faulty logic that would have you believe that buying undiscounted cash flow at 25X is not somewhat insane.

  • So I am genuinely asking here. KMP issues a lot of debt to achieve it's 50/50 structure....but it never seems to pay anything off...they just keep rolling the debt. In fact...since they distribute every last bit of cash flow possible....it is not clear that they actually have the capability to ever retire debt. There will come a time when these pipelines will reach the end of their life....yet will still have debt outstanding on them roughly half of their purchase value. So then what? I no longer have a pipeline generating cash flow to cover the debt....if I can't roll it...this scheme goes to hell in a handbasket in short order. In a C-corp...there obviously is no recourse for creditors beyond the equity. Is the same true for the MLP structure. In the event of a bankruptcy...can creditors clawback past distributions from limited partners? Couldn't they make the argument that perhaps you should have planned on paying off the debt related to a specific pipeline during its operational life and that by failing to do so....distributions related to that specific pipeline were improper? Even if there is no possibility for clawbacks...any comments on when/how KMP would ever reduce it's debt load...given it's commitments to distributing cash

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 16, 2012 9:43 PM Flag

    continued...
    This is exactly what is going on at KMP. Depreciation isn’t just a tax dodge to minimize taxes…it represents the true cost to put an asset into service for its useful life. If there is no profit after depreciation…then it isn’t worth doing. By ignoring depreciation…you are pretending that a pipeline is a house….that it will have the same or greater value in 20 years than it does today and that simply is not a realistic assumption. We may disagree on the remaining life of these assets…if you have reason to believe there are 40 years of life remaining, it would be legitimate to reduce the depreciation accordingly…but to simply ignore it is just bad analysis. In time…whether it is 10 years, or 20 or 30, KMP will start retiring these pipelines. They (the partnership) will never last that long, but let’s just say they did.
    The year is 2032, and let’s say a $1B pipeline is deemed unsafe for operation….or perhaps the eagleford play is simply done….and has but a trickle of gas is left to transport so it’s simply unprofitable to operate. Now, you have a huge problem….because first of all, it’s going to take a lot of money, now, and in the future to shut this guy down with no future revenues….and uh oh….you have $500M of bonds due next month…directly related to the 2012 acquisition. So that asset you have been pretending is still worth $1B by ignoring depreciation now has zero revenue, is going to take tens of millions to shut down, and worst of all…..you have an immediate need to come up with $500M to pay off the loans you never bothered to pay off…. Because you had to make your “distributions” I don’t know the answer….but you LP owners better be sure you aren’t on the hook when they can’t roll the debt….just sayin….you might want to know for sure.

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 16, 2012 9:38 PM Flag

    John, Thanks again for the discussion.
    So perhaps a house is not the best example…nor is anything related to tax depreciation which is it’s own animal….let me elaborate. A house is a very unique asset. Of my $80k house, a good chunk of that market value is simply the value of the land…which of course does have a rather infinite life…give or take a few years:) Some parts of the home itself also have a very long life. The slab, the frame, wiring, pipes, sheetrock and windows….all could be expected to last a good 50-100 years with a little luck. A good roof, on the other hand, may last 25 years and cost $5k to replace. A refrigerator may cost $1k, and have an expected life of 10 years. So, we can probably agree that a houses actual life…say 100 years, and it’s depreciable life per the IRS at 27.5 years are out of whack. That’s why I ignored it in the cash flow analysis…I suppose I should not have brought it up at all. So I have about $1k a year in regular maintenance costs.. a fence last year, a water heater just a few weeks ago (technically capital...per KMP logic...these would be considered capital and would not reduce dcf...food for thought)though any year now, I could get hit with an additional 5k to replace an AC and 1K to replace a fridge. To answer your question, I do not carry a mortgage, but I suppose it would be around $400 a month at current rates.
    A pipeline, however is a very different animal. Every hour of every day, corrosion….admittedly just a tiny bit, is encroaching both from the earth on the outside, and the not so environmentally friendly products being carried through them. The earth is expanding and contracting, and those 30 year old welds made in 1982 by a guy with a mullet are being stressed daily at a microscopic level. Sure, you can pump it full of chemicals, monitor it with XRAY PIGS and protect it with cathodic protection, but in the end…it will become more costly to maintain than to simply replace…especially if the volumes available to be shipped have decreased since the pipeline was put into service…which is usually the case.
    So let’s ignore depreciation expense for tax purposes and instead think about depreciation simply as the spreading of an assets cost over its useful life. I would then argue that a pipeline is more like, say a car, owned by a rental company. This car is a cash generating asset. It will be leased to customers and let’s just say that net of maintenance, taxes ect, this $22k car will generate 5k in positive cash flow per year. In year 1-4, the company can say…look at us…we are generating 5k of cash flow per year….and distribute that to owners. At the end of year 4, the car’s useful life as a rental is over, and it is sold to auction for $2k. So over its life, one could honestly say that the car generated 22k of cash flow….but zero profit. Without profit…there simply is no point…you could have obtained the same 22k payout by putting the cash in a box, and pulling it out each year as you needed it…with none of the risk. Now, any car company operating in this manner probably wouldn’t last very long before these accounting absurdities came to light. A pipeline, on the other hand, with its much longer life cycle (though still quite finite) can keep up this charade for decades…covering up bad deal after bad deal with more debt, more shares, and more bad deals.

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 16, 2012 1:55 PM Flag

    Rich and I go way back...though I doubt he would remember little ol me. Actually I really hope not because he'd probably have me whacked:) This is all on Rich.. it's his baby after all..Goldman is just the money...though they do have little miss Kim keeping an eye on him...

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 16, 2012 1:50 PM Flag

    continued...
    Back to my rent house. Let’s say I converted it to an MLP, with myself as the GP and you as the LP. Up for grabs is $8k of cash flow….that’s a constant regardless of my business structure. The deal is….I sell my house to the partnership for $80k…but get to keep half of the cash flow. You…as the LP are paying 98% of the market value ($80k)…for $4k of cash flow. Why?? If an 8K cash flow is worth $80k, then a $4k cash flow is only worth $40k…. So in a very real way…Rich is selling KMP $100 bills for $200 a pop. This is the real key to the Kinder Morgan story….In the elderly, he has found a large pool of ignorant investors to dupe with a fairly complicated scheme most simply lack the industry specific and financial knowledge to analyze. But the math isn’t that complicated….this thing will collapse sooner or later. The KMP business model is purchasing cash generating assets for twice their value, then writing them off and pretending that “profits” don’t matter. My goal is to simply get the math down in the historical record so when that time comes…. You fools can’t play the “ but nobody told us” card. Just like with Enron, Madoff and Stanford….anybody with a spreadsheet and a bit of common sense can do the math on KMP and figure out where this train is headed….if you care to look.. Most won't, and will lose their life savings when this turd starts to sink.

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 16, 2012 1:46 PM Flag

    John…I appreciate the debate… Thanks you!! Here is my reply.
    The problem with your analysis is your assumption that these pipelines will have an effective infinite lifespan. They most certainly do not. A brand new pipeline, like say REX may have a good 15 or 20 years of effectively maintenance free operation. But pipelines are made of steel, and at some point, maintenance cost starts to creep up and risk of failure(hopefully not catastrophic) does as well. All else equal, one would expect the annual cash flow from a pipeline to decrease year after year as maintenance and downtime trend upwards over time. So while in theory, a pipeline may have an indefinite lifespan, the economic lifespan for this vintage of pipelines is probably 35-45 years. This was a wild guess on my part, but I assumed an average age of the acquired pipelines to be 20 years….and that they would thus have about another 20 years before they are retired. If….you want to assume in your economic model that they actually have a good 100 years left in them, and that cash flow will remain constant or grow, and that no significant future capital expenditures will be required, than it is quite likely you would come to different conclusions about these dropdowns than I am.
    However….
    I do like your rent house analogy….let me build upon that. I actually have a few rent houses, so let me throw some numbers at you. I own one property that is about 10 years old, and has a market value of about $80k, which I rent for $1000 a month. Net of insurance, taxes, and maintenance costs, I pull in about $8k a year in positive cash flow. Depreciation…using IRS guidelines is about 3k per year, so my reported profit is about $5k a year (before tax) on $8k in cash flow. The payout on this little investment is 10 years (80k/8) Not great, but it’s better than a CD….admittedly a bit riskier as well. In another 20 years, when my house is fully depreciated, yes, it will still be here, but, in the meantime, I will have probably replaced the roof at least once, put in a couple new air conditioning systems, refrigerators, stoves, fences ect… and replaced the flooring four or five times….. That’s what depreciation expense is, an accounting estimate of wear and tear….and it is true cost, and a pipeline is no different. To ignore it means that you believe….in 20 years…KMP will be able to sell these ancient pipelines for the purchase price of 6.2B inflation adjusted dollars.
    I say not a chance in hell….by that time….many of them will actually be liabilities. I was involved once in accounting for liabilities associated with a pipeline that had been abandoned for some time….the company I was working for had a reserve on the books for tens of millions of dollars for future environmental remediation claims. Every time a contaminated site was found, a few a year, it cost a lot of money to dig up all of the contaminated soil, dispose of it properly, and replace with new soil. There is nothing special about Rich’s pipelines….they too will all end up as liabilities on somebody’s books at some point….it just won’t be KMP’s
    Back to this dropdown…you, the LP, are paying 6.22B for an annual cash payout of 246M, so it takes 25 years before the LP even gets his initial investment back…and that is assuming constant cash flows….I just don’t believe that for a minute. So in a very real way….you could have just instead purchased 6.22B in cash, and distributed it for 25 years and called it even. This goes back to our assumptions….if you believe that this cash flow will continue indefinitely…I guess you could come to a different conclusion…. But even that aside…can’t you at least see that you are getting a raw deal from the GP on this deal? You have essentially paid $200k for a house worth 80k (I would gladly sell my house to you….ping me:)

  • Reply to

    Dropdown Math Fail

    by enronbuddy Aug 9, 2012 1:41 PM
    enronbuddy enronbuddy Aug 9, 2012 8:21 PM Flag

    Small correction...the PE is actually 248, not 246...itchy math finger.
    Just had a chance to do some more Kinder (garten??)-calculus. Using numbers from above….this turd of a dropdown takes 25 years to reach payout (6.22B/246M annual cash to LP)…. In all my years in this industry…I don’t think I have ever seen anyone intentionally pursue a project with a projected payout more than a hair over 11…(long story). Yet here we are….discussing a 6.2B transaction that takes 25 years…just to reach payout.. On the other hand…it’s probably better than REX…which will probably never payout… Here’s a hint….if you think these already aging pipelines are still going to be around in 25 years…without a significant capital infusion (perhaps a few more billion of debt and equity issuances)… then you might just be dumb enough to own this stock. Rich should just start selling KMP $100 bills for $200 bucks a pop and quit this crap about pretending to be a pipeline business...

  • enronbuddy by enronbuddy Aug 9, 2012 1:41 PM Flag

    Now that the dropdown details have been announced, we can do some analysis. Since I know that all KMP/KMR owners are dumber than a box of rocks….I have decided to do the math for you…to once again show you how much of a moron you have to be to continually let Rich have his way with you.

    So, from the release, the sales price is 6.22B which is 8X EBITDA (I assume for the partnership in total…not for KMP/KMR…very important distinction). So annual EBITDA will be $777.5M. If remaining life of pipelines is 20 years, we have depreciation of 311M, and since this will be funded roughly half by new debt at let’s say 3.5%, we will add 105M a year in interest expense. The GP will take the ~50% of cash flow he is entitled to, leaving the LP with $246M in cash flow and $25M in profit.
    So this nice little acquisition has a PE of 246. You could almost beat this “performance” By sticking $100 in a safe and pulling out $5 every year for 20 years. Of course…KMP hasn’t actually made a profit in what…over a year now, so I’m pretty sure $100 in a safe will outperform KMP/KMR.

    The math on KMP is extremely simple. If you truly think that “earnings don’t matter” well….you just aren’t thinking very hard. You can only squeeze so much cash from any pipeline, and when you have to give half to a GP upfront, there just isn’t very much value left. The burden of the GP far exceeds any income taxes you have been fooled into thinking you are avoiding. Income taxes require profit after all….and KMP has none.
    Wake up fools!! KMP/KMR only exist so Rich can skim all the cash off the pipelines while you are on the hook for all the debt, and the massive dilution from the billions of new shares issued each year.

    This dropdown allows Rich to sell you an asset for 98 cents on the dollar…and yet keep 50% of the cash flow for himself. It’s an incredible deal for him….for KMP…it is borderline criminal. If you really want to know how bad you are getting it…go to scribd.com and search for: kinder morgan summary analysis

  • Reply to

    KMP down over 13% time to run

    by chickemmen2002 May 9, 2012 3:41 PM
    enronbuddy enronbuddy May 11, 2012 1:25 PM Flag

    The only thing I would advise is to not own shares of KMP or KMR.

  • Reply to

    Divested Rockies assets

    by okfixer May 11, 2012 10:32 AM
    enronbuddy enronbuddy May 11, 2012 1:24 PM Flag

    The question shouldn't be who...it should be how much. With a build cost of about $7B, KMP is in this for about $3.5B. Lets just say the current book value, with a few years of depreciation and the latest write off, book value is probably a little less the 3B...I'll eyeball it at $2.8B.
    Per the 2011 annual report,KMP's 50% of REX generates income of $86M per year...adding back in depreciation, lets round and assume that KMP's 50% ownership of REX generates $200M of cash flow a year. That's probably a stretch....as it doesn't include some corporate level overhead, but we will go with it. Using a rule of thumb of 7X cashflow, maybe...just maybe they can sell this dog for $1.4B....meaning you...KMP/KMR shareholders could have another $1.4B loss headed your way...or not...you do the math yourself.
    Of course, since KMP has to sell this....they don't really have a lot of negotiating power, and outlooks are not exactly rosy for REX...it could get much uglier. Maybe they should just hand the title over to the bondholders of REX and be done with it?

    You want to know what is most awesome of all? I am pretty sure...please correct me if I am wrong...that even though you(KMP/KMR) paid for 98% of REX....perhaps the
    most abysmal investment Rich has ever made....the cash from the sale can be counted in DCF....which means Rich and KMI could get half of the sale price....even though they only paid 2%, and it was their decision to aquire EP in KMI....forcing you to get boned yet again. Do the math folks. You have no protections from the GP's blatant conflicts of interest, and he has proven time and time again he has no problem bending you over a table.

  • Reply to

    Forward P/E - still a bit too high!!

    by rjcrystal43 Apr 24, 2012 10:53 AM
    enronbuddy enronbuddy May 10, 2012 1:36 PM Flag

    continuing
    But… But…But…. Rich has made me a lot of money. Just look at the 10 year returns? True… I will grant that Rich Kinder is really good at one thing…and it’s not running pipelines. Nobody, not even Ken Lay or Bernie Madoff has been more successful at finding idiots to spend billions of dollars on what appears to be worthless and unprofitable securities. Again…yes, I am talking about you…. Anybody who owns this stock clearly lacks the ability to read a financial statement, or even do elementary school level math. Don’t be too ashamed….very few can do both.
    I have no doubt that this insanity can continue for at least a few more years, but it will collapse in the end (when is Rich retiring??). Shares outstanding and debt continue an upward trajectory, and yet profits are elusive. Simply put, there is no mathematical reason for KMP to exist. You have no rights, protections, or recourse against the GP’s blatant conflicts of interest, and only half of the cash flow from assets, even though you pay 98% of the cost…. All nicely divulged in the annual report you have never bothered to read. You couldn’t stop these dropdowns from happening even if you wanted to any more than you could have stopped the construction of REX, or any of the other terrible investments your beloved GP has made on your behalf. He could force you to buy the same pipeline for $150…$200…$1000…. regardless of its value (maybe $40). Some day…when the market runs out of morons willing to soak up the $billions of new shares issued each year to keep this crap box afloat, it will sink like a rock. Then….. Rich’s buddies at the bank….you know the ones who you owe $16.7 Billion as of 1Q2012…. (and billions more as you overpay for dropdowns over the coming years) Those guys will be the new owners of your unprofitable pipelines. Fortunately for them you put up 50% equity….they might not even lose a dime. Wanna guess who they will hire to run them? Probably the same guy who helped them rack up billions in fees skimming profits off gullible and powerless MLP owners. KMP/KMR owners…welcome to MATH…it’s a kinda great invention!!

  • Reply to

    Something smells like stinky fish....

    by nukemtiltheyglow May 7, 2012 9:53 PM
    enronbuddy enronbuddy May 10, 2012 1:33 PM Flag

    KMI Dropdown Math-Good for EP

    Here is how it works. KMI goes out and buys itself a nice pipeline. Let’s just assume, it has a price/ free cash-flow ratio of about 7. So they pay $100 for the pipeline, and it generates about $14 of cash-flow a year. If the remaining life of the pipeline is 20 years, that would be $5 a year in depreciation, and let’s just say $2 a year for overhead…hopefully enough to pay for some top notch accountants and chip in a few pennies for Rich’s annual salary. So the profit on this pipeline would be $7 a year, less some interest expense, say $3…rates are low, so a net of $4.
    But, being ever so generous and magnanimous, Rich decides that rather than keep all of this money to himself, he would like to share it with his LP buddies at KMP/KMR. So, he decides to let them in on the deal by selling them the pipeline into the brilliant structure that is the MLP. First off….at what price? At book value? $100? That doesn’t sound fair….after all, poor Rich put a lot of effort into acquiring this pipeline….how about $102 (he did have to get down on his knees after all-at least that’s what I read). This sounds fair right? So KMI sells the pipeline to KMP for $102…of course, since KMI has a 2% ownership in KMP, they pay their share…about $2. They take the $100 from the MLP, and pay off the debt incurred to purchase the pipeline in the first place.
    So…now what does the math look like for KMI? As 2% owner in ~$14 of free cash flow a year, Rich takes his $0.28 a year and buys a lollypop…right? Well of course not. As GP, he is entitled to about half of that. So He gets his $7, but depreciation is negligible as is interest expense….he’s only in for $2 after all. By transferring the assets to the LP, KMI has actually increased their cash flow over had they simply held onto the pipeline by transferring all of the cost to the LP, yet still hanging onto half of the cash flow. That Rich Kinder is such a magnanimous bastard….that’s why you all love him right?
    Sure…why not…let's look at KMP’s income statement now and see why you love him. KMP now owns the same pipeline, but is only entitled to $7 of free cash flow.(That pushes our ratio from 7-“pretty good”, to 14-“are you stupid really?” Subtract out the depreciation and some interest expense and yep….no profit. But that’s ok…nothing else they own is profitable either….”profit isn’t important…We are an MLP” as in “More Lube Please??”…that is what it stands for right? All it takes is some pretty simple math to see that even with the tax advantages of an MLP, with a 50% IDR tier like Kinder Morgan, all assets would be better off in a standard Corporate structure. Sure…Uncle Sam might get 35% of your profit (oh right…there is no profit), but that is far better than what is effectively a 50% tax on cash flow…regardless of profit. One day, a professional analyst capable of elementary school math is going to take a look at KMP/KMR and call it what it is…. A mechanism to let Rich Kinder legally bone his LP patsies. Yes…that means you KMP/KMR.

  • Reply to

    Forward P/E - still a bit too high!!

    by rjcrystal43 Apr 24, 2012 10:53 AM
    enronbuddy enronbuddy May 10, 2012 1:31 PM Flag

    Dropdown Math-good for KMI
    Here is how it works. KMI goes out and buys itself a nice pipeline. Let’s just assume, it has a price/ free cash-flow ratio of about 7. So they pay $100 for the pipeline, and it generates about $14 of cash-flow a year. If the remaining life of the pipeline is 20 years, that would be $5 a year in depreciation, and let’s just say $2 a year for overhead…hopefully enough to pay for some top notch accountants and chip in a few pennies for Rich’s annual salary. So the profit on this pipeline would be $7 a year, less some interest expense, say $3…rates are low, so a net of $4.
    But, being ever so generous and magnanimous, Rich decides that rather than keep all of this money to himself, he would like to share it with his LP buddies at KMP/KMR. So, he decides to let them in on the deal by selling them the pipeline into the brilliant structure that is the MLP. First off….at what price? At book value? $100? That doesn’t sound fair….after all, poor Rich put a lot of effort into acquiring this pipeline….how about $102 (he did have to get down on his knees after all-at least that’s what I read). This sounds fair right? So KMI sells the pipeline to KMP for $102…of course, since KMI has a 2% ownership in KMP, they pay their share…about $2. They take the $100 from the MLP, and pay off the debt incurred to purchase the pipeline in the first place.
    So…now what does the math look like for KMI? As 2% owner in ~$14 of free cash flow a year, Rich takes his $0.28 a year and buys a lollypop…right? Well of course not. As GP, he is entitled to about half of that. So He gets his $7, but depreciation is negligible as is interest expense….he’s only in for $2 after all. By transferring the assets to the LP, KMI has actually increased their cash flow over had they simply held onto the pipeline by transferring all of the cost to the LP, yet still hanging onto half of the cash flow. That Rich Kinder is such a magnanimous bastard….that’s why you all love him right?
    Sure…why not…let's look at KMP’s income statement now and see why you love him. KMP now owns the same pipeline, but is only entitled to $7 of free cash flow.(That pushes our ratio from 7-“pretty good”, to 14-“are you stupid really?” Subtract out the depreciation and some interest expense and yep….no profit. But that’s ok…nothing else they own is profitable either….”profit isn’t important…We are an MLP” as in “More Lube Please??”…that is what it stands for right? All it takes is some pretty simple math to see that even with the tax advantages of an MLP, with a 50% IDR tier like Kinder Morgan, all assets would be better off in a standard Corporate structure. Sure…Uncle Sam might get 35% of your profit (oh right…there is no profit), but that is far better than what is effectively a 50% tax on cash flow…regardless of profit. One day, a professional analyst capable of elementary school math is going to take a look at KMP/KMR and call it what it is…. A mechanism to let Rich Kinder legally bone his LP patsies. Yes…that means you KMP/KMR.

  • Reply to

    KMP down over 13% time to run

    by chickemmen2002 May 9, 2012 3:41 PM
    enronbuddy enronbuddy May 10, 2012 1:28 PM Flag

    continued...

    But… But…But…. Rich has made me a lot of money. Just look at the 10 year returns? True… I will grant that Rich Kinder is really good at one thing…and it’s not running pipelines. Nobody, not even Ken Lay or Bernie Madoff has been more successful at finding idiots to spend billions of dollars on what appears to be worthless and unprofitable securities. Again…yes, I am talking about you…. Anybody who owns this stock clearly lacks the ability to read a financial statement, or even do elementary school level math. Don’t be too ashamed….very few can do both.
    I have no doubt that this insanity can continue for at least a few more years, but it will collapse in the end (when is Rich retiring??). Shares outstanding and debt continue an upward trajectory, and yet profits are elusive. Simply put, there is no mathematical reason for KMP to exist. You have no rights, protections, or recourse against the GP’s blatant conflicts of interest, and only half of the cash flow from assets, even though you pay 98% of the cost…. All nicely divulged in the annual report you have never bothered to read. You couldn’t stop these dropdowns from happening even if you wanted to any more than you could have stopped the construction of REX, or any of the other terrible investments your beloved GP has made on your behalf. He could force you to buy the same pipeline for $150…$200…$1000…. regardless of its value (maybe $40). Some day…when the market runs out of morons willing to soak up the $billions of new shares issued each year to keep this crap box afloat, it will sink like a rock. Then….. Rich’s buddies at the bank….you know the ones who you owe $16.7 Billion as of 1Q2012…. (and billions more as you overpay for dropdowns over the coming years) Those guys will be the new owners of your unprofitable pipelines. Fortunately for them you put up 50% equity….they might not even lose a dime. Wanna guess who they will hire to run them? Probably the same guy who helped them rack up billions in fees skimming profits off gullible and powerless MLP owners. KMP/KMR owners…welcome to MATH…it’s a kinda great invention!!

  • Reply to

    KMP down over 13% time to run

    by chickemmen2002 May 9, 2012 3:41 PM
    enronbuddy enronbuddy May 10, 2012 1:27 PM Flag

    Drop Down quick math

    Here is how it works. KMI goes out and buys itself a nice pipeline. Let’s just assume, it has a price/ free cash-flow ratio of about 7. So they pay $100 for the pipeline, and it generates about $14 of cash-flow a year. If the remaining life of the pipeline is 20 years, that would be $5 a year in depreciation, and let’s just say $2 a year for overhead…hopefully enough to pay for some top notch accountants and chip in a few pennies for Rich’s annual salary. So the profit on this pipeline would be $7 a year, less some interest expense, say $3…rates are low, so a net of $4.
    But, being ever so generous and magnanimous, Rich decides that rather than keep all of this money to himself, he would like to share it with his LP buddies at KMP/KMR. So, he decides to let them in on the deal by selling them the pipeline into the brilliant structure that is the MLP. First off….at what price? At book value? $100? That doesn’t sound fair….after all, poor Rich put a lot of effort into acquiring this pipeline….how about $102 (he did have to get down on his knees after all-at least that’s what I read). This sounds fair right? So KMI sells the pipeline to KMP for $102…of course, since KMI has a 2% ownership in KMP, they pay their share…about $2. They take the $100 from the MLP, and pay off the debt incurred to purchase the pipeline in the first place.
    So…now what does the math look like for KMI? As 2% owner in ~$14 of free cash flow a year, Rich takes his $0.28 a year and buys a lollypop…right? Well of course not. As GP, he is entitled to about half of that. So He gets his $7, but depreciation is negligible as is interest expense….he’s only in for $2 after all. By transferring the assets to the LP, KMI has actually increased their cash flow over had they simply held onto the pipeline by transferring all of the cost to the LP, yet still hanging onto half of the cash flow. That Rich Kinder is such a magnanimous bastard….that’s why you all love him right?
    Sure…why not…let's look at KMP’s income statement now and see why you love him. KMP now owns the same pipeline, but is only entitled to $7 of free cash flow.(That pushes our ratio from 7-“pretty good”, to 14-“are you stupid really?” Subtract out the depreciation and some interest expense and yep….no profit. But that’s ok…nothing else they own is profitable either….”profit isn’t important…We are an MLP” as in “More Lube Please??”…that is what it stands for right? All it takes is some pretty simple math to see that even with the tax advantages of an MLP, with a 50% IDR tier like Kinder Morgan, all assets would be better off in a standard Corporate structure. Sure…Uncle Sam might get 35% of your profit (oh right…there is no profit), but that is far better than what is effectively a 50% tax on cash flow…regardless of profit. One day, a professional analyst capable of elementary school math is going to take a look at KMP/KMR and call it what it is…. A mechanism to let Rich Kinder legally bone his LP patsies. Yes…that means you KMP/KMR.

  • Reply to

    KMP down over 13% time to run

    by chickemmen2002 May 9, 2012 3:41 PM
    enronbuddy enronbuddy May 10, 2012 1:00 PM Flag

    Keep it up Chicken!!

KMP
78.32+0.46(+0.59%)Apr 16 4:02 PMEDT

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