Kinder Morgan buying El Paso
Board: Value Hounds
El Paso, KMI and KMP
KMI was formed and became a publicly traded company in 2011. It was previously Kinder Morgan Kansas KMI sold common stock. Existing investors prior to the IPO hold classes A,B, and C stock.
Kinder Morgan Inc of today is composed of subsidiaries—Kinder Morgan Kansas and Kinder Morgan Energy Partners [KMP]
KMI owns the general partner and 11% of the limited partner interests of KMP. Through KMP they operate or own interest in the assets of KMP—pipelines and terminals. The general partner owns all of the voting shares of Kinder Morgan Management [KMR] and KMI as indirect owner has the authority and power to manage the KMP business. That includes authorizing acquisitions.
Accounting is by the equity method
It is KMI that is buying El Paso
The total price tag is approximately $38 billion including El Paso debt.
Details of the deal
Kinder Morgan, Inc. (NYSE: KMI) and El Paso Corporation (NYSE: EP) today announced a definitive agreement whereby KMI will acquire all of the outstanding shares of EP in a transaction that will create the largest midstream and the fourth largest energy company in North America with an enterprise value of approximately $94 billion and 80,000 miles of pipelines. The total purchase price, including the assumption of debt outstanding at El Paso Corporation and including the debt outstanding at El Paso Pipeline Partners, L.P. (NYSE: EPB) is approximately $38 billion.
The consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI's closing price as of Oct. 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on Oct. 14, 2011.
The offer is comprised of $14.65 in cash, 0.4187 KMI shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI's closing price on Oct. 14, 2011. The warrants will have an exercise price of $40 and a five-year term. EP shareholders will be able to elect, for each EP share held, either (i) $25.91 in cash, (ii) 0.9635 shares of KMI common stock, or (iii) $14.65 in cash plus 0.4187 shares of KMI common stock. All elections will be subject to proration and in all cases EP shareholders will receive 0.640 KMI warrants per share of EP common stock. The receipt of shares and warrants by EP shareholders in the transaction is intended to be tax free for U.S. federal income tax purposes. Upon closing, KMI shareholders are expected to own approximately 68 percent of the combined company and EP shareholders are expected to own the remaining 32 percent.
All shares used are KMI. No KMP units are used for the transaction.
The warrants are well under water and if KMI fails to appreciate, they won’t be further dilution of shareholders.
EP will be a subsidiary of KMI. KMI will sell the exploration and production segment and expects to get $6 billion. The cash from the sale will be used to lower debt
All of the pipeline from El Paso will be sold to KMP and El Paso Pipeline Partners over the next 4 years.
By the end of 2015, KMI expects its assets to consist almost exclusively of its general partner interests in KMP and EPB, and the ownership of KMP units, KMR shares and EPB units. At that point, well over 80 percent of KMI's cash flows is expected to come from the general partner interests and essentially all of the remainder from its limited partner interests.
Dividends look safe. KMI expects the increased cash flow to cover dividends easily and pay down debt. KMI is expecting to be able to grow the dividend at 12.5%. It exceeds the previous guidance of 10% growth
The debt levels are going to skyrocket. KMI predicts with the sale of the E&P unit, pipeline to KMP and EPB and the cash flow, debt reduction will be rapid.
KMI expects its ratio of debt to distributions received will be lower than its current level of about 2.5 times by the end of 2013 and that the ratio of consolidated net debt for the entire enterprise (including debt at KMP and EPB) to consolidated EBITDA will return to a little over 4 times by the end of 2014. "Given the quality of the assets that will be owned by the combined enterprise and the stability of cash flows that these assets generate, we believe that we have a clear path to achieving these expectations and that the resulting debt levels are conservative," said Kinder.
KMP is expected to purchase a significant portion of EP's natural gas pipeline assets over the next few years at attractive prices. These assets will enhance KMP's already very stable cash flow stream and will provide significant additional growth opportunities. For 2012, the KMP distribution per unit and KMR dividend per share are expected to be a little less than $5.00, up from a budgeted $4.60 for 2011. Over the next several years, the average annual growth rate in KMP distributions per unit and KMR dividends per share is expected to be around 7 percent, higher than the prior estimate of 5 percent annually, with the increase being driven by the expected dropdowns resulting from this transaction
The combined company will be the:
• Largest owner and operator of natural gas pipelines and storage assets in North America with approximately 67,000 miles of natural gas transportation pipelines. Pipelines are connected to many important natural gas shale plays including Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett. Largest provider of contracted natural gas treating services and significant other midstream gathering assets.
• Largest independent transporter of petroleum products in the United States, transporting approximately 1.9 million barrels per day of gasoline, jet fuel, diesel, natural gas liquids and crude oil through more than 8,000 miles of pipelines.
• Largest transporter of CO2 in the United States, transporting 1.3 billion cubic feet per day. Carbon dioxide is used in enhanced oil recovery projects.
• Second largest oil producer in Texas, producing over 50,000 barrels per day.
• Largest independent terminal owner/operator in the United States. Liquids terminals have capacity of 107 million barrels and store refined petroleum products, ethanol and more. Dry bulk terminals are expected to handle over 100 million tons of materials in 2011, including products like coal.
• Only oil sands pipeline serving the West Coast. The Trans Mountain pipeline system transports 300,000 barrels of crude oil per day to Vancouver, B.C., and Washington state.
The debt levels and interest payments will not be inconsequential. El Paso looks over-leveraged to me at present. It is clear, El Paso is not run with the same efficiency and shareholder friendly methods Kinder has perfected. One huge plus is that the potential of El Paso may be realized when it becomes part of KMP.
El Paso’s total debt is $14.2 billion and the debt to capital ratio is 75%.
KMI total debt is around $15 billion. That does include the KMP debt of nearly $13 billion. Here is where I am not quite certain how we should think about the debt levels. KMI has only an 11% interest in KMP and yet consolidates KMP’s entire debt load on their balance sheet. That may not be the way to go about thinking through this deal. If we were to consolidate all the debt, then KMI’s debt/capital is 81%. Without the KMP debt, the ratio is 48%. Looking at net debt to EBITDA at KMI currently [including KMP] it is around 6%. If it comes down to 4%, that’s a huge improvement.
El Paso has interest payment in excess of $1 billion per annum. Interest expense in 2010 was $1031 million putting a sizable dent in their $2341 EBIT. That’s nearly 50% of operating income eaten away by interest expense. KMI has an interest expense of $668 million in 2010 on EBIT of $1136. Again around 50%. It will be critical to bring these payments down quickly. In addition to what is already being paid in interest, there will be additional interest due on the $11 billion in cash being lent by Barclays. With the reasonably good management at KMP by Kinder to date, I would be inclined to believe he could get the debt paid down as he anticipates and that the dividends will not be impacted negatively.
This company –KMI—and all its relationships with KMP and KMR are difficult to unravel. I have probably started to look at KMP and other MLPs at least a dozen times over the years and been defeated after reading through the 10Ks.
I am still searching for yield. My parents are getting antsy having 15% cash on hand—they need income. I am getting tired of searching for and finding undervalued companies only to see them snatched away by the newest wave of unwarranted optimism in a volatile market. It’s getting old
KMP [not KMI] looks like a good place to sit for awhile. The yield trailing is 5.9% and the TTM dividend is $4.47. Ex-dividend is Oct 27. I am thinking about trusting Rich Kinder and putting my Nike's on and just doing it. I like the combination and even though the debt levels will be agonizingly high, the company seems confident they can be paid down in short order and without dinging the dividends. The resulting company will be a powerhouse in pipelines.
If anyone can add anything about KMP, KMI and R Kinder, please educate us.