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Subject:  Re: first linn now KMP,KMR,KMI Date:  9/6/2013  4:53 PM
Author:  LeKitKat Number:  16025 of 25354

I think it's a mistake to try to make an MLP into a C-corp for purposes of analysis. They are dissimilar in capital structure and accounting for distributions. This was the most irritating thing about all the short analyst comments and articles on blogs like Seeking Alpha. You can't squish an LLC or an MLP into a C-corp mental mold.

They exist on debt and equity to grow since they pay out a majority of cash to unit holders. There is a standard calculation to figure distributable cash and it doesn't look good when you try to argue they should use free cash flow to cover distributions. Because they need constant access to debt, this does make them risky in high interest rate environments and since distributions are sometimes supplemented with debt, then that becomes a real risk for continued high yield. KMxs probably are less risky than Linn.

High credit spreads can be a problem for MLPs and make it more difficult to get access to debt. It also tends to dampen enthusiasm for riskier equities and investors start looking for alternatives and may buy bonds instead of the stock. Spreads look low right now compared to 2008-2009. MLPs managed to survive and continue paying distributions. They did underperform as investments and anything similar to 2008-2009 would be a big risk to owning MLPs.

The argument they should be low debt and pay distributions from free cash flow just doesn't fit--that's not how they work. They use debt to grow;they pay out by a formula that has leeway as interpreted by the directors. That poses risks in certain economic environments including high interest rates and wide credit spreads. A big solid company like KMP is less risky than a small fast growth upstart like Linn. Hedgeye has never seemed to grasp the reason for being for a tax-advantaged MLP and if they try to crush KMP with the same logic they applied to Linn, it should be a forgettable analysis.
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