Paul L. Caron

Tuesday, August 12, 2014

Kinder Morgan Abandons MLP Structure It Pioneered, Sticking Investors With Big Tax Bill

New York Times, Kinder Morgan’s Reorganization Puts Master Limited Partnerships in Question, by David Gelles:

KinderWhat happens when the pioneer of an industry abandons its own legacy?

When Kinder Morgan announced on Sunday that it was consolidating its four related pipeline companies into one, executives and bankers from Houston to New York, particularly those in the merger and energy sectors, were stunned.

With the move, Kinder Morgan, a $100 billion empire that transports much of America’s oil and natural gas, was abandoning the master limited partnership structure it helped popularize. Largely because of Kinder Morgan’s success, the partnerships have become increasingly popular for energy companies. The structure allows them to pass all profits along to their investors as dividends, and pay no corporate taxes (though the investors are subject to taxes on the distributions).

But now, with Kinder Morgan restructuring as a traditional corporation, questions have emerged about what will happen to the many other master limited partnerships. If Kinder Morgan no longer wants to be one, does the structure still make sense for other companies?

Adding to the sense of uncertainty was the Treasury Department, which said on Monday that it was examining whether the partnerships were depriving the government of needed tax revenue. Although the partnerships have mostly managed to fly under the radar, the renewed focus on the corporate tax code and its loopholes is putting the structure under new scrutiny.

Despite the move by Kinder Morgan, and saber-rattling from Washington, master limited partnerships are for the most part seen as safe for now.

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To me, if you buy a hat and later the seller takes back the hat and you HAVE to accept a pair of pants instead, that's not right. Even if it's a GREAT pair of pants and the seller throws in a couple bucks to boot, what you wanted was a hat.

Likewise, when you think you have bought a tax efficient MLP and then find out it's turning into something completely different that's taxable, this seems like it shouldn't be legal, in my opinion.

I could be wrong, but someday I expect the Securities and Exchange commission to delve into this new territory and tighten the rules.

All that being said, I think the merger is great news for most and they should be celebrating, but bad news if you're in a higher tax bracket and need just tax exempt income, so they are sighing and groaning.

Posted by: Gentle Ben | Aug 13, 2014 11:30:06 AM