This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Kinder Morgan Discusses, Downplays MLP Merger

NEW YORK (TheStreet) - Kinder Morgan Inc. (KMI - Get Report) on Monday distributed a five page press release responding to a Barron's article that criticized the firm's non-GAAP financial reporting and the relationship between the company and its limited partnership vehicles, Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB). In the press release, Kinder Morgan discussed the prospect that it might consolidate its sprawling master limited partnership (MLP) empire. 

"As was mentioned in our analyst day materials, KMP would consider other options if we get to a point where we cannot deliver attractive returns to LP investors. However, we do not believe we are at that point," Kinder Morgan said.

"We would point out that KMP has a highly attractive total return prospect, with a current yield of nearly 7% and a target distribution growth rate of 5% for the next three years supported by organic expansion capex projects of nearly $14 billion that we expect to place in service over the next 5 years," the pipeline giant added.

Specifically, Kinder Morgan was referring to discussion in its January 29, 2014 investor day, when CFO Kimberly Dang indicated that that the company could re-visit its general partner and limited partner relationships if stock performance warranted such a review.

"In certain circumstances, the GP has demonstrated a willingness to give back. And we've done acquisitions where we have a ramp in the cash flow. And so, we have a very supportive GP. But all I can say is the structure is working today. If it did - if we've come to a point sometime in the future when it's not working - then we will look at ways to solve that and consider other options," Dang said in January.

The relationship between Kinder Morgan, the general partner, and its various limited partnership MLP interests has been a topic of discussion and some criticism for years.

Still, as Kinder Morgan noted at its investor day, the general partner has identified acquisitions and investment opportunities that's increased distributions from $70 million to over $4 billion, between the late 1990s and 2013. General partner and limited partner stocks have performed strongly since their inception.

Kinder Morgan said in January that absent acquisitions, it expects 5%-to-6% distribution growth at Kinder Morgan Energy Partners and 8%-to-9% at the general partner.

However, there would be precedent for a general partner and limited partner merger. In 2010, Enterprise Products Partners (EPD) merged its limited partner and general partner interests into one entity.

GP and LP Criticism, Slowing Growth

Barron's, in its article published on Sunday, focused on the amount Kinder Morgan's limited partner interests pay in certain capital expenditure and the high portion of earnings that those MLP's pay to the general partnership, Kinder Morgan Inc.

Deutsche Bank analysts said Barron's was bashing Kinder Morgan with "old inaccuracies." Bank of America Merrill Lynch analysts characterized Barron's article as "old news getting re-hashed, but still grabbing attention." 

The Barron's article keyed in on the size of Kinder Morgan MLP entities, slowing growth rates, and high profit payouts to the general partner as issues hanging over limited partner stocks. Barron's, citing analysis from Hedgeye Risk Management, also questioned whether Kinder skimps on maintenance capital on its pipeline's and reports some pipeline capex incorrectly in its CO2 crude oil production business.

"While we think these critiques have varying degrees of validity, they are not new and we think they are overly discounted in KMP's current unit price," Bank of America analysts concluded.

Other MLP Mergers More Likely?

At the January investor day, co-founder and CEO Richard Kinder fielded questions from analysts and shareholders and was asked whether Kinder Morgan limited partner El Paso Pipeline Partners would remain a standalone LP interest or eventually be consolidated into Kinder Morgan Energy Partners, given its poor share price performance.

Mr. Kinder indicated that the company might re-evaluate its MLP complex at the end of 2014, and especially if performance continued to lag. He also said such decisions would rest on independent directors and would also hinge on votes by MLP unitholders.

Here's the transcript of the call:

Must Read: Verizon Expects to Follow Comcast in Netflix Deal

Question: On EPB, longer term, would you expect it to remain standalone or at some point if the discount continues, to be consolidated into KMP?

Richard Kinder: Well, we always look at all those alternatives. Clearly, to do that, it would take a unitholder vote at both entities and it would take the independent directors, not Steve and me to make those decisions. As I said at the time of the El Paso merger, at sometime that probably makes sense to put the two together. We don't mind having the two outstanding, but it probably makes sense, at some point, to put them together, but that would be up to the directors and the unitholders of those entities, but it's a possibility. We'll just see how it develops.

Mr. Kinder also said that Kinder Morgan Inc.'s interest in Florida Gas Transmission, a joint venture 50% shared with Energy Transfer would remain within the general partnership through 2014.

"Right now, we have FGT in the model staying at KMI through 2014 and then we'll take another look at. It's kind of almost like, we don't operate it. It's sort of almost like owning an interest in an MLP," Mr. Kinder said.

For context, El Paso Pipeline Partners currently carries a market capitalization of over $6.5 billion. The MLP, however, has seen its share price fall nearly 30% over the past 12-months.

Kinder Morgan Inc. shares fell nearly 3% in Monday trading on the negative Barron's article. Kinder Morgan Energy Partners shares fell over 5%.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
KMP $102.03 1.98%
KMI $17.76 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs