MERGER: Kinder Morgan and El Paso
Issue: How do I enter the Kinder Morgan and El
Paso merger?
Cause: Kinder Morgan completed its merger with El
Paso 5/24/2012 for cash and Kinder Morgan stock.
The SEC filing for this merger can be found at through the Kinder
Morgan web site at:
http://www.kindermorgan.com/investor/kmi_sec_filings.cfm
Choose the S-4A filing of 1/3/2012.
Resolution:
This merger is a cash plus stock reorganization, which are
becoming more and more frequent in recent years. All the information below is
from the information available from the S-4 filed with the SEC. Cost basis
allocation information is from IRS Form 8937. Access to Form 8937 is available
at http://www.kindermorgan.com/investor/Form_8937_May_25_2012_Organization_Action.pdf
.
This merger has an additional complication in that warrants
as well as Kinder Morgan stock was issued as part of the merger consideration.
Also, owners of El Paso could choose different scenarios for their merger
consideration. This document will cover the mixed consideration choice. This
was the default scenario if no choice was communicated. This transaction also
generates 2 cash-in-lieu payments - one for fractional shares of Kinder Morgan
stock and one for fractional warrants. Check with your broker if these are not
reported separately. To properly enter this merger, the amounts for each
portion need to be entered separately. You can estimate the separate
cash-in-lieu amounts using the price per share data for Kinder Morgan, the
warrants and the ratios used to for calculating the number of KMI shares and
warrants received in the merger.
First, if you have made any entries for this transaction in
the Club Accounting software, you should delete them.
To record this merger will require multiple entries in the
accounting software. The basic outline of these entries is given below:
Enter a large Return of capital
transaction to have the program calculate the capital gain reportable for this
merger.
Write down the
capital gains, both long-term (LTCG) and short-term (STCG).
Delete the large Return of capital
entry.
Enter capital gain distributions
for the LTCG and STCG.
Enter a smaller Return of capital
for the remainder of the cash received.
Enter the actual merger transaction
A spinoff transaction will be
needed to account for the warrants.
The capital gain realized is limited to the actual cash
received so some clubs may need to adjust the capital gain amounts before
entering the capital gain distributions. Instructions for doing are included. The
total merger consideration is $29.32 per El Paso share. Your capital gain will
be based on this total consideration with a limit that the total capital gain
can not be more than the total cash received.
1. Calculate the capital gain.
The total merger consideration is $29.32 per El Paso share.
This is $14.65 in cash and $14.67 in Kinder Morgan shares and warrants.
Calculate the total value received for your El Paso shares by multiplying 29.32
by the total shares of El Paso owned.
Total Proceeds = [29.32 x (# of El Paso shares owned)] –
(Reorganization fee)
Enter the total proceeds amount in the dividend entry
screen. Change the “type” to Return of capital. Date the transaction 5/31/2010.
The security is El Paso. Save the transaction.
The program will change some of the Return of capital, if
appropriate, to LTCG and STCG.
Look at your transactions history and WRITE DOWN the amount
for LTCG and STCG.
After you have recorded these amounts you can delete the
Return of capital transaction. Although the LTCG and STCG entries were
generated by the Return of capital entry you may need to delete them separately
in the program.
Next you need to compare the sum of the capital gains to the
total cash received, excluding cash for fractional shares.
The total cash received should be [14.65 x (# of El Paso
shares held)] – (Reorganization fee).
If your total capital gains are less than or equal to the
total cash received skip to the next section, 2. Accounting for Cash
Received.
If your total capital gains are greater than the total cash
received, continue with this section to adjust your capital gains so they are
equal to your total cash received.
Since the structuring of this merger limits your capital
gains to the cash received you need to adjust your gains downward. This will be
done by calculating the total decrease needed and the apportioning the decrease
to the LTCG and STCG according to each type’s share of the total calculated
capital gains. Here are the items that need to be calculated first.
Total Capital gain = Total CG = LTCG + STCG
% LTCG = LTCG/ (LTCG + STCG)
% STCG = STCG/(LTCG + STCG)
With these calculated you can calculate the final LTCG and
final STCG.
Final LTCG = (Total Merger Cash Received ) x (% LTCG)]
Final STCG = [(Total Merger Cash Received) x (% STCG)]
Merger Cash does not include cash-in-lieu payments. It only
includes the cash portion of the merger consideration.
If you have done the calculations correctly, (Final LTCG +
Final STCG) = Total cash received.
If , (Final LTCG + Final STCG) = Total cash received, go to
the next section, 2. Accounting for Cash Received.
2. Accounting for Cash
Received
All of the following entries use the cash dividend screen,
in CA3 this is Transactions > Cash Dividend or Distribution, and
online at Accounting > Cash Dividends.
Date these transactions 5/24/2012
The security should be El Paso
Change the “type” field to Long-term capital gain.
Amount should be your LTCG as calculated above.
Next repeat the process for your short-term capital gain.
Change the “type” field to Short-term capital gain.
Amount should be your STCG as calculated above.
If you had to adjust you capital gain, the amount of LTCG
and STCG in these entries will be the actual LTCG and actual STCG as adjusted
above.
Finally, enter a return of capital entry.
Change the “type” field to Return of capital.
Amount should be: (Total Cash received) – ( LTCG + STCG)
If your LTCG + STCG = Total Cash Received, no return of
capital entry is needed.
Continue to step 3, The Merger.
3. The Merger
Go to Transactions > Merger or Accounting >
Securities > Record merger of securities depending on the version of the
software being used. If you are unfamiliar with merger transactions you can get
help at this URL: http://www.iclub.com/support/kb/default.asp?page=normal_merger
Here is the information you need to complete the merger.
Date: 5/24/2012
Old Security or Merging Company: El Paso
Price per share of old Security / El Paso: Use
the last valuation price
Cash received: See your broker statement for
cash-in-lieu
New Security: Kinder Morgan (KMI)
Shares received : .4187 x (# of El Paso
shares owned)
(Remember to include fractional shares.)
Save the transaction and this is finally done.
4. The Warrants Spinoff
Go to Transactions > Spinoff or Accounting
> Securities > Record spinoff of securities depending on the version
of the software being used. If you are unfamiliar with spinoff transactions you
can get help at this URL: http://www.iclub.com/support/kb/default.asp?page=normal_spinoff
This spinoff is different because the number of warrants received
is based on the number of El Paso shares owned rather than the
shares owned of the parent company. Those two are related though.
Here is the information you need to complete the spinoff.
Date: 5/25/2012
Select Parent Security (or Parent Company) :
Kinder Morgan (KMI)
Remaining Basis Percentage: 91.67
Cash received: See your broker statement for
cash-in-lieu received
Spinoff Security (or Symbol of New Company)
: Kinder Morgan Warrants (KMI.WS)
Shares received : .64 x (#of El Paso shares owned)
(Remember to include fractional shares.)
For example, if you owned 100 El
Paso shares, you should receive .64 x 100 = 64 KMI.WS shares.
Price Per Share : 1.91
Save the transaction and the spinoff has been entered.
Please note:
In testing this information, the ticker symbol used here was not recognized by
the database used to download valuations in the accounting software. You will
need to manually enter the price per share for this security for each valuation
as long as the club owns it. The ticker symbol KMI.WS can be used to find the
price data from bigcharts.com. The symbol KMI-WT can be used to find the price
from Yahoo Finance.
A worksheet is provided below to record the items that need to
be calculated.
Calculation Worksheet
A. Total Proceeds received.
29.32 x (# of El Paso shares) = ____________________________
B. Total merger cash received.
[14.65 x (# of El Paso shares)] –
( Reorganization fee, if any) = ________________
Large Return of Capital (ROC) entry amount is equal to A.
C. LTCG = _____________________ (see transaction
list after large ROC entry, record here)
D. STCG = ____________________ (see transaction
list after large ROC entry, record here)
E. LTCG + STCG = __________________ . Is this
greater than B, Total cash received?
F. Return of Capital amount = (Total Merger Cash
Received) – (LTCG + STCG) = ______________
This is if LTCG + STCG are less than Total Cash
received.
Capital gain adjustment, if LTCG + STCG are greater than
Total Cash received.
G. % LTCG = (LTCG)/ (LTCG + STCG) =
_________________
H. % STCG = (STCG)/ (LTCG + STCG) =
_________________I
J. Actual LTCG = (Total merger cash) x (%LTCG) =
________________________.
This is the amount to enter if LTCG + STCG are
greater than Total Merger Cash received.
K. Actual STCG = [(Total merger cash) x (%STCG)] =
________________________.
This is the amount to enter if LTCG + STCG are
greater than Total Merger Cash received.
L. Shares of Kinder Morgan Received = .4187 x (#
of El Paso shares owned) = __________.
(For the merger transaction)
M. Total warrants received = .64 x (# of El Paso
shares owned) =
(For the spinoff transaction)
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