Owning public LPs, Enbridge, Kinder, etc.

Do any of you AFers own any energy LPs/MLPs or their corporate cousins? Examples including:

EPB (El Paso Pipeline Partners LP). El Paso corporate was bought by Kinder.

KMP (Kinder Morgan Energy Partners LP) while KMi is Kinder Morgan Inc.

EEP is Enbridge Energy Partners LP, while ENB is Enbridge Inc.

The LPs have higher yields, but if you own them in a taxable account, you receive a K1 instead of a 1099, where as if you own the corporate you’d get a regular 1099, is that correct? So would it be better to hold the LP in a IRA or Roth where you don’t have to deal with the tax paperwork? I wanted to see if any of you had first hand experience with owning these.


There are a lot of resources out there on the internet on this. Check out Miller Howard. They have some good info regarding IRAs, MLPs and UBTI/K-1. If you are interested in owning KMP but don’t want to file a K-1 then you can buy KMR. KMR is one of a few newer types of structures designed for instituions that seek to make it easier for mutual fund PMs and institutions to gain exposure to MLPs. Also, because many investors don’t yet understand them they can trade at a marginally higher yield than KMP (they should trade at parity).

I am smiplifying slightly: KMR is a publicly trading limited partner in KMP that recieves identical distributions from KMP as any ordinary investor. Then KMR pays out that distrbution in shares of stock, as opposed to cash. Just file the 1099 and still recieve your 7% distribution, just in stock as opposed to cash.

I saw KMR on Cramer’ s Mad Money few weeks ago. Def. seems like the way to go.

What’s your overall investment thesis in MLP’s? I’m interested in Midstream MLPs for example $SEP, transporting natural gas…I figure that’s the only way to make money from NG. However, MLPs have low cost of capital so I’m not convinced a “moat” exists with them as I think it would be easy to build new pipes.

You will receive a K-1 regardless of what account you hold them in. If they are in the ROTH or a tax-deferred account, you need to be mindful of UBTI (Unrelated Business Taxable Income), which could cause you to still pay taxes. In connection with that, I believe the recapture that is considered ordinary income will be considered UBTI, so dont just pay attention to the UBTI they generate during the holding period. This isnt an issue that I have seen tested by the IRS so could be quite a few opinions and we really wont know the answer until someone fights it (or you get audited).

The paper work really isnt that hard. They do typically come (the K-1s) relatively late, but for me that isnt too big an issue. The paper work can get a bit difficult if you are trading partial positions, but if you are in and out with a full position, it is pretty simple. But the real tax advantage comes from holding these and holding them in a taxable account so that the distr. would be taxed much less than a dividend.

I was recently buying APU under 40 and KMP under 78.

One concern could be what happens with any “fiscal cliff” tax agreements.

I disagree with regard to the moat. I mean, yeah all you have to do is build new pipes, but its a relatively consolidated and capital intensive industry. Not to mention building trans-border pipelines is not easy (remember Keystone XL), so it’s best to buy an existing player if that’s what you’re after. You would also have to negotiate all of the land agreements.

I don’t think pipeline capacity is going to expand terribly quickly in the near term. Plus as we keep getting more gas and oil out of the ground and generate more power with it, it all has to go somewhere, so I think that the pipeline operators are in the position to be able to raise rates.

To be honest I haven’t run any valuations on these guys, I just work around companies that use these companies in their business and the dividends and relative importance of the pipelines to the industry make it seem like a decent investment.

Had a buddy that made a boat load on MLPs a few years ago. As of 2011, he thought the prices were inflated and sold his positions. I don’t know what they look like now, but just be careful. 7% dividend is nice, but only help when you get double digit losses lol

I disagree with your friend that MLPs are overvalued. Obviously you could make a lot of money on them in 2009, but you could also buy ISRG at $80 and SPACs liquidating in 3 months at 20% discounts to par. Really, in early 2009 anybody with some cojones, some money and some patience could make a boatload of money.

MLPs now are valued differently than they were in 2009. Treasury rates are lower and the Fed has provided some certainty that they will remain so barring surprise upside in economic growth, dividend stock yields are compressed, it should be no surprise that MLPs are trading near 6% yields as opposed to 8% or 9%. Mid stream MLPs are still a good place for my money long term. The stock prices may rise and fall but if you can have confidence in balance sheet strength you can be comfortable in the MLPs. 6% yield growing at around 10% from a business with a secular tailwind (shale boom) and stable “toll taker” revenues is an investment I am will to hold on to. I can’t tell you how many people I speak with equate MLPs with NG prices, when in reality mid-stream MLPs have an inverse correlation with NG prices because low NG prices mean electricity produced by NG is cheaper which means more NG power plants which means greater pipeline volume and higher toll revenue. Food for thought: pretty much every new power plant being constructed in the US today is NG.

I don’t know if he’d still think they are over valued. Just pointing out dividend is only part of the returns of these investments.