Liza and Marklibera, thanks for the thoughtful comments. Mark, I suspect that there is very little duplicate overhead regarding these two MLPs at Kinder Morgan. In house accountants routinely work on multiple entities that are owned by a parent company. Yes, there'd be some filing and paperwork reduction from a merger, but I don't see big cost savings like what happens when two unrelated companies merge and can eliminate clearly duplicative overheads.
Both GPs are 100% owned by KMI, and both MLPs are already in the maximum 50% IRD split level, so there is no way that the total cash coming to KMI will increase from a merger of EPB and KMP. But, Mark and Liza, I do buy the argument about simplifying the investment choices that Kinder Morgan offers. Having investors choose between KMP and EPB probably isn't beneficial to KMI. If an investor likes Kinder Morgan and wants to own their MLP, there should be one choice.
Liza, I think there is a difference between an acquisition of an unrelated company and an in-house merger of two 100% owned entities. The NRGM/CMLP and RGP/PVR mergers were between unrelated companies, so each party must drive the best deal for their own investors.
Yes, it is no secret that KMI bought El Paso because they needed assets to drop down to KMP in order to keep up the distribution growth at KMP. If El Paso hadn't merged with KMI, all of those assets would have gone to EPB. So it is EPB's loss.
Liza, can you think of any examples where a completely in-house merger of two wholly owned MLP resulted in a shifting of value to a more favored MLP?
I don't see why EPB has to be the red haired step sister. They are just paper entities, and the LMP units have been bought and sold by investors over and over again. EPB could change its name to Kinder Morgan Pipeline Partners, and they might as well both be fair haired direct blood relatives. But I think that KMP stalling on distribution growth probably hurts KMI more than EPB stalling growth.
Liza, could you say why you believe there would be a benefit to KMI from merging EPB into KMP? The individual pipeline companies that EPB owns would keep their separate identities for legal and regulatory purposes. Separate books for each pipeline. So where does the big cost savings come from? The same number of K-1's would have to be issued, except that they'd all be from KMP if they merged. Computers do the printing of the tax reports, and computers don't complain about the work.
It would be unseemly for Kinder Morgan to merge the two MLPs, and in the process announce that EPB unit holders will suffer a reduction in current distributions, and KMP holders suffer no reduction in distributions, or get an increase. I'd think that in any merger, Kinder would want to be able to say that no unit holders would suffer any distribution reduction. As for future growth, the KMP holders would all be in the same boat.
KMI owns 41% of the LP units of EPB. Would KMI want to destroy the market value of that investment? What KMI needs is cash flow from the MLPs. Which MLP it comes from shouldn't matter that much. Merging the two MLPs wouldn't change the cash flow from the pipelines and other businesses. I don't see how paperwork reduction from a merger would be that great.
As for engineering a distribution growth slowdown at EPB, it wouldn't make sense for KMI to arrange for EPB's pipelines to receive less favorable rate case settlements, or to try to drive away customers from WIC. The distribution growth slowdown at EPB resulted from business operating conditions. It wasn't self induced by KMI.
As far as I know, the B doesn't stand for anything. It's not like the partnership's name is El Paso Brothers. Probably the New York stock exchange offered a limited number of choices and El Paso Corp back in 2007 chose B. EPD was taken, and they probably didn't want EPA.
ETP had to "transform" itself over the past 2 or 3 years. Its primary assets served conventional resource plays in Texas, as I recall. ETP bought the SUG natural gas pipeline, Sunoco Logistics, and exited the propane business. Major transformation.
EPB doesn't have to transform itself. Its yield is generous and tax deferred, but growth will not resume until 2015 or 2016.
The Wall Street Journal reports today that Coastal Energy Corp has been sold for $2.2 billion (Canadian) to a Spanish based energy company. Oscar Wyatt, Jr., Coastal's largest shareholder, owned 26% of the company. So Mr. Wyatt has succeeded in recovering from the disasterous El Paso merger.
"KMI has to pay corporate tax on what they get, shareholders’s taxes are deferred."
I would think that the distributions received by a corporate unit holder would be tax deferred return of capital until the corporation has zeroed out its tax basis in the MLP, just like an individual unit holder would do. I'd bet that the distributions being paid by EPB to KMI are still tax deferred because EPB is a relatively new MLP. The basis wouldn't be zeroed out yet. I think that once the basis reaches zero, new distributions are treated as capital gains, and thus get favorable tax treatment.
Yes, its in their "bylaws," that is, their MLP agreement. It is not required by (tax) law. And that applies to their Available Cash, which is a defined term in the agreement.
"KMP could increase the cash distribution PER UNIT more rapidly, thus making each unit much more valuable - or it can raise the per unit distribution more slowly and issue new shares, thus raising more capital. They clearly use the second choice."
Sleepym, I don't think there are two choices. MLPs want to increase their distributions as fast as safely possible, but they need the cash flow to cover the distribution. Where will that cash come from? They need new projects or acquisitions, and they need to issue new units to fund those projects or acquisitions.
If the MLP had a business that generated significant increased cash flow without requiring additional capital investment, the MLP would just increase the distribution rate per unit without issuing any additional units. As the rate of distribution per unit increases, it pushes the distribution into higher target levels for the IDR. So the IDR holder would get the increased cash flow anyway.
I think most KMI holders know the pipeline industry quite well, and are confident that MLPs are for real, so they don't really fret about quarterly earnings reports.
Purplespyderman, thanks for your reply. You pointed out in a subsequent reply (that I can't find) that IDRs are not referred to as "units." That got me thinking. They are "rights," plural, more than one, even though it is sort of an overall singular "right."
If there is more than one right, how many rights are there? The answer might be that there is one right associated with each unit of the MLP that has been issued. Maybe there is a separate right for each "target" level that the distribution (rate) has achieved?
In either case, I got my answer. When new units are issued, the holder of the IDRs will receive an increased amount of the distributable cash even if the holder, usually the GP, buys no new LP or GP units, and even if the MLP does not increase the rate of distribution per unit. If the distribution rate is in the IDR payout range, then the IDR holder will receive increased distribution from the newly issued LP units, even though it has purchased none of these new units.
Liza was pointing this out too, but not at the specific level of detail that my mind needed.
I've read and read. So do you agree with Liza that if an MLP issues new units, but does not raise the distribution rate per unit, and the GP does not buy any new LP units or GP units, AND does not receive any new IDR units, the cash flow distributed to the GP still increases?
This assumes that there is some increase in the total distributable cash, but all of that increase may be needed just to pay the distribution on the newly issued units. How is the amount of increased cash distributable to the GP calculated. The mechanism for determining total IDR payments is tied to the amount of distribution PER UNIT, and that rate is NOT increased.
Ok, I'll have to give up on this issue, and let it sit for some duration of time, and then renew it with whoever brings it up again. One of us isn't quite clear on the concept of how available cash is distributed and how IDRs work and what they are.
Unfortunately no one else in the world is going to weigh in on this question. No one understands what I am trying to get at. No one can probably even find this post in the rabbit warren of replies that Yahoo formats them in.
The Yahoo message board format great for when there are 5,000 comments about a movie star's dress and no one should read even 1% of them. With stocks, ever post should have prominence and be easily found.
KMI has a lot of knowledgeable shareholders. I wish some were articulate on this matter.
Until next time.
So we are talking about an increase in "total cash distributed across all units?" None of that increase is going to be of any benefit to the GP or to previously existing LP unit holders unless they buy some of these newly issued units, or unless the distribution rate per unit is increased. Otherwise that money will just go to pay distributions on the new units.
The topic here is the faster growth of KMI vs KMP. It has been commonly stated by many sources that the mare issuance of new units by the LP results in an increase cash flow to the GP. Arithmetically we can see that the only way the GP will get any of this increase in available cash flow is for it to buy more units, or for the LP to increase the rate of distribution per unit. Neither of which is guaranteed to happen.
Can't PDH just sell their plant to one of the companies that is dying to get into this business? The stock isn't working so lets move on everybody.
Here's my next (3rd post) discussing the 2nd post:
Note that there is a very specific formula for how Available Cash will be distributed. The 3rd target level was a 50-50 split for all distributions in excess of $.43 (something) per quarter.
If, after new units are issued, the MLP does not increase the rate of cash distribution Per Unit, then neither the common LP unitholders nor the GP can possibly receive any more cash per unit.
The distribution formula concerns itself with Available Cash and the rate of cash distribution per unit. To just say that any increase in the number of LP units issued will automatically increase the cash flow to the GP requires one to pull numbers out of thin air. Available Cash may increase as a result of the issuance of new units, but maybe just enough to maintain the current distribution level. In that case, the GP gets nothing additional by way of the IRDs.
I've read several authors repeat the same contention about new units automatically increasing cash flow to the GP. They never provide citations or specific examples of what they are talking about. Don't be like those people, Liza.
More from the EPB prospectus, page 71:
Incentive distribution rights represent the right to receive an increasing percentage (13%, 23% and 48%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.
The following discussion assumes that the general partner maintains its 2% general partner interest and continues to own the incentive distribution rights.
If for any quarter:
• we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and
• we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;
then, our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and the general partner in the following manner:
• first, 98% to all unitholders, pro rata, and 2% to the general partner, until each unitholder receives a total of $0.33063 per unit for that quarter (the “first target distribution”);
• second, 85% to all unitholders, pro rata, and 15% to the general partner, until each unitholder receives a total of $0.35938 per unit for that quarter (the “second target distribution”);
• third, 75% to all unitholders, pro rata, and 25% to the general partner, until each unitholder receives a total of $0.43125 per unit for that quarter (the “third target distribution”); and
• thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
Liza, see my nest post.
Liza, here is a relevant provision from EPB's MLP prospectus:
General Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner initially will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its 2% general partner interest if we issue additional units. Our general partner’s 2% interest, and the percentage of our cash distributions to which it is entitled, will be proportionately reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest. Our general partner will be entitled to make a capital contribution in order to maintain its 2% general partner interest in the form of the contribution to us of common units based on the current market value of the contributed common units.
Liza, note the 3rd sentence above. The percentage of the cash distributions that the GP is entitled to will be reduced if it doesn't maintain its 2% interest. Just so we agree that this can happen.
See my following post regarding IDRs.
Liza, I've read this contention a couple of times before and can't understand how it is possible. If KMP issues more LP units, but KMI does not purchase or acquire any of these units, and if KMP does not increase the distribution rate per unit after the new issuance, how can KMI possibly receive an increase in cash flow?
What would be happening with the number of GP units as a result of KMP's new issuance of more LP units? The GP has to hold 2% of the total units (LP and GP), so KMI has to at least (purchase?) more GP units. Are they given or purchased? My point is that KMI's increased cash flow doesn't just come automatically.
I can't let this day pass without acknowledging the announcement of Kinder Morgan's acquisition of El Paso two years ago today. No one will remember Hedgeye a year from now. Rising interest rates depress KMI's share price but provide an opportunity to acquire some REITs and bank preferreds, and get a little more interest from bank CDs. Enjoying the remaining years, staying happy and healthy is more important than money (net worth).
October 17th doesn't go by unnoticed by me. KMI price is a little low, probably due to rising interest rate concerns taking the air out of all income investments. My biggest concern is proper diet and exercise. Not money, thanks in large part to the KMI merger.
Hey, start a new topic. This item doesn't belong in the Warrants topic. But anyway, Richards was never a KMI guy. He was with El Paso E&P and that was sold as a precondition to El Paso's merger with KMI.