Kinder Morgan Discusses, Downplays MLP Merger

NEW YORK (TheStreet) - Kinder Morgan Inc.  (KMI) 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:

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%.

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