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Author: emiller8988 Big red star, 1000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 524  
Subject: Re: differences Date: 6/10/2005 3:53 PM
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Ok... I put this together from a couple of other posts just for ease of finding it

1- would it be a good thing or bad thing to hold these in a Roth IRA (i.e. would I be wasting certain tax advantages)?

you are exactly right. You'd be wasting a tax advantage by holding KMR in an IRA/ROTH. As long as YOUR yearly distribution of KMP stays below $1000, you're OK holding it in an IRA. However, there are multiple reasons not to hold an MLP in an IRA. The UBTI is certainly one of them. PUBLICALLY TRADED PARTNERSHIP is another name for MLP's... here's a good website with UBTI information.
http://www.ptpcoalition.org/

2- differences.... you asked for it. First the short answer, then the long one

SHORT
KMP/KMR have a unique relationship. KMP distributions generate UBTI which makes them "difficult" in tax advantaged accounts (IRAs etc). Also, up until the latest tax bill out of congress, MLP's could not be held by mutual funds.

KMR was developed to get around those restructions. KMR pays a "stock dividend" that amounts to the same distribution that KMP pays out. Because KMR pays the "distribution" in shares... there is no tax owed until the shares are cashed in. You get tax free compounding.

Here's how it works. KMP will pay out a distribution of $0.76 on 4/31

Say you hold 100 shares of KMR... KMP pays a quarterly cash distribution of $0.76 per unit, and for the sake of discussion, let's assume the average trading price of KMR over the 10 consecutive trading days preceding the ex-dividend date equals $42 per unit. As a result, the KMR quarterly stock dividend would equal 0.01762 KMR shares ($0.76 / $42 = 0.01809) for each share of KMR owned

You then own 101.8 shares. Every quarter your shares total compounds. Now... KMR's only asset is the KMP shares it owns... get it? SO! when KMR gets the quarterly dividend check from KMP, it turns around and uses the cash from the dividend check to buy more shares of KMP. Depending on how many shares of KMP it is able to buy... it issues a similar number of new KMR shares to its shareholders in the form of a "partial stock split". There is no share dilution because each share of KMR issued by the KMR company is counterbalanced by a newly purchased share of KMP. SO! share dilution is avioded by buying KMP shares and holding them in trust for the KMR shareholders.

LONG
Up until recently, institutional investors shied away from publicly traded units of master limited partnerships due primarily to various tax-related issues. However, as the size and scope of MLP acquisitions grew, the MLP community recognized their potential need/desire to tap into the huge market of institutional capital and attempted to legislatively remove the arcane tax regulations. In May 2001, Kinder Morgan Energy Partners (KMP) introduced a brand new organizational structure, commonly referred to as I-shares, which effectively mitigated these tax-related institutional investment barriers. To date, there are only two public I-share companies, Kinder Morgan Management LLC (KMR) and Enbridge Energy Management LLC (EEQ). Instead of going into specifics for each one, let's describe a more generic I-share relationship/structure.

For discussion purposes, we'll collectively refer to the I-share company as “MLP-I” and the associated master limited partnership as “MLP”. MLP-I is a limited liability corporation (LLC) that was formed to manage and control a master limited partnership (MLP). As an example, assume that MLP-I is planning a public offering of 10 million MLP-I shares at $40 per share. Projected proceeds of approximately $400 million will be used to purchase a like dollar-amount of I-units from MLP, who in turn will use the proceeds to pay down debt associated with a recent accretive acquisition of certain midstream assets. The relationship between MLP and MLP-I is symbiotic, and following the offering, a discussion of one is not complete without the other. Simply put, MLP-I was formed as a corporate vehicle for institutional and pension fund investors to participate in MLPs. MLP-I will manage and control the business and affairs of MLP. While similar in nature, there is one key difference between the two. The ownership or sale of MLP-I shares by a mutual fund will not generate nonqualifying income, and as a result, will be treated as a qualifying asset, which eliminates the need for associated K-1 filings for federal income tax purposes. In addition, MLP-I pays only a stock dividend that will be taxed as a return of capital.... NO UBTI for the MLP-I shareholders

Conversely, the ownership or sale of MLP units by a mutual fund or pension plan will generate nonqualifying income, which can have adverse tax consequences. As such, this relatively new organizational structure effectively eliminates this barrier while also adding another investment alternative for individuals seeking an investment in the partnership.

Summed up, MLP-I provides MLP with the added benefit of indirect access to institutional investors. From a distribution standpoint, the general partner and common unitholders of MLP will receive distributions in cash, while MLP-I shareholders will receive dividends in additional MLP-I shares. The MLP-I stock dividend is calculated by dividing the amount of cash being distributed per MLP common unit by the average market price of an MLP-I share over the 10 consecutive trading days preceding the ex-dividend date. [explained above in the short one]. When MLP-I receives additional I-units from MLP, MLP-I will issue and distribute an equal number of MLP-I shares to MLP-I shareholders. The cash equivalent of distributions of I-units will be treated as if it had actually been distributed for purposes of determining the distributions to MLP's general partner. However, MLP will not actually distribute the related cash to MLP-I but will retain the cash and use it to help grow the business. Interestingly, MLP-I consistently trades between a 5%-15% discount to MLP and as such, MLP-I usually carries an implied higher yield than MLP. You can rationalize a modest price discount since MLP-I pays a stock dividend and shareholders will incur transaction costs to monetize the dividend. However, the upper end of this price discount range is difficult to explain and one can only attribute a discount of this magnitude to market inefficiencies. Don't be surprised to see the trading gap between MLP and MLP-I narrow. Separately, MLP-I has been criticized due to the potential for recurring and growing dilution associated with quarterly stock dividends. Recent legislation has very favorable for MLP's and will provide a soft sustained tailwind.

You should realize that MLP's in general are interest rate sensitive and tend to not do as well in a rising rate enviroment.

here's what Morningstar says about KMR and their managment...
We think founder Richard Kinder is one of the best CEOs in energy, and he has often been a finalist for Morningstar's CEO of the Year award. This may sound strange, considering that Kinder was president of Enron until 1996, but he left well before the funny business began. We admire that Kinder is the lowest-paid CEO of any major public corporation. Since the firm's founding, his only compensation has been his $1 annual salary. As the largest shareholder, his personal fortune rises and falls with those of the firm's limited partners. All other executives have their base salary capped at $200,000, and cash bonuses in 2003 were all under $1 million. The only major ding on our fiduciary grade comes via the characteristics of the master limited partnership structure, which limits limited partners' rights.

as with any company, you should see what they have to say for themselves....
http://www.kindermorgan.com/investor/presentations/presentations.cfm

you might also want to check out this presentation from the KMR archives... it's from 2003
http://www.kindermorgan.com/investor/presentations/kmi_2003_howard_weil_april.pdf
esp look at pages 16-18
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