Pipelines and midstream operations typically are pretty boring subjects, as far as Wall Street is concerned.
But the past few years at pipeline kingpin Kinder Morgan Inc. (KMI) and its master limited partnership subsidiaries Kinder Morgan Energy Partners, LP (KMP) and El Paso Pipeline Partners, LP (EPB) have been anything but.
Today is more of the abnormal same for the Kinder Morgan family.
Kinder Morgan is making a massive deal in which it will purchase all the units of KMP and EPB, as well as KMP limited partner Kinder Morgan Management, LLC (KMR), for $44 billion in cash and stock and assume around $26 billion in debt, coming to a grand $71 billion. Investors will get between a 12% and 16% premium when the deal closes.
The combined market value of the new KMI — which will trade as a regular corporation — will be more than $90 billion, making KMI the fourth largest energy firm in the U.S. and more of a powerhouse in the midstream sector.
The approach is a radical one — taking out the lucrative MLPs in the name of boosting shareholder value — but it does show that Kinder Morgan still has plenty of gas left in the tank.
Why Goodbye for MLPs?
One of the cool things about Kinder Morgan is its size. It’s basically one of the largest pipeline and midstream firms in the nation, with more than 82,000 miles worth of pipelines and over 180 different terminals and storage facilities crisscrossing the country.
Problem is, Kinder might just be too big.
Growth is there, but it has slowed. Thus, the appeal of KMI/KMP was the ability to collect steadily increasing distributions tied to Kinder’s pipelines and other midstream infrastructure. It became a nice “utility” play for investors.
Richard Kinder apparently didn’t want to be “just” another utility, though, which brings us to the deal.
The combination of Kinders will mean an abandonment of the lucrative tax structure that Kinder Morgan helped popularize back in the 1990s — ironically enough, at a time when everyone else is jumping on the MLP bandwagon.
The reason? Kinder wants to be able to aggressively grow into the future.
A while back, Kinder Morgan was subject of several negative articles published in Barron’s. Analysts at Hedgeye Risk Management questioned KMP’s ability to continue producing quality cash flows as well maintenance CAPEX at several of its pipeline due to the amount of capital and incentive distribution rights (IDRs) paid back into its parent KMI. That caused shares of the entire Kinder Morgan complex — KMI, EPD, KMP and KMR — to drop.
Ratings agency and mutual adviser Morningstar estimated that to increase its distribution by 5% to 6% a year, Kinder would have to put nearly $3 billion to $4 billion to work every year on new projects.
That’s an insane amount of spending, and perhaps an impossible task given Kinder’s sheer size.