A Closer Look at Kinder Morgan-El Paso

 | Oct 17, 2011 | 2:30 PM EDT
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Kinder Morgan Energy Partners (KMP) has agreed to acquire El Paso Corp. (EP) for $37.8 billion, including all of El Paso's debt. El Paso is one of nation's the largest natural gas companies with exploration, production and transportation subsidiaries. Kinder Morgan is a set of interlocking companies, some only partially owned but all seemingly controlled by one individual, Richard D. Kinder.

To clarify, there are three publically traded Kinder Morgans. Kinder Morgan Inc. (KMI) can be viewed as the parent company. It is the general partner and owns approximately 11% of Kinder Morgan Energy Partners, and approximately 14% of Kinder Morgan Management (KMR). But Kinder Morgan Management owns approximately 29% of Kinder Morgan Energy Partners, so it could also be considered the parent company, too.

Kinder Morgan Inc. has a market capitalization of approximately $21 billion, a price-to-earnings ratio of approximately 59 and a dividend yielding approximately 4.5%. Kinder Morgan Management has a market capitalization of approximately $6 billion, a PE of approximately 210 and no dividend.

The key to the three companies appears to be the mutually owned subsidiary, Kinder Morgan Energy Partners. It has a market capitalization of approximately $24 billion, a PE of approximately 128 and a dividend yielding approximately 6.4%. Its operations are conducted through subsidiaries and grouped into five business segments: Products Pipelines, Natural Gas Pipelines, CO2, Terminals and Kinder Morgan Canada. Kinder Morgan Energy Partners also has a 20% interest in NGPL PipeCo, the owner of Natural Gas Pipeline Company of America, and a 50% interest in Petrohawk Energy Corp.'s natural-gas gathering and treating business in the Haynesville shale gas formation.

El Paso has a slightly different structure. The parent company operates in three segments: pipelines, exploration and production, and marketing. In May the company announced plans to spin off its exploration and production business. In the merger announcement, Kinder Morgan described plans to sell El Paso's exploration and production segment. Kinder Morgan believes the net operating loss carryforwards will offset taxes associated with this sale and the resulting cash raised will substantially reduce the debt borrowed to fund the cash portion of the merger.

El Paso owns a 43% interest in El Paso Pipeline Partners (EPB) and that interest conveys in the acquisition. El Paso Pipeline Partners' assets consist of four wholly-owned entities: Wyoming Interstate Company, an interstate pipeline transportation business primarily located in Wyoming and Colorado; Southern LNG Co., which owns an LNG storage and regasification terminal near Savannah, Georgia; Elba Express Pipeline Co., an interstate pipeline company located in Georgia and South Carolina; and Southern Natural Gas Company, an interstate natural gas company located in the southeastern U.S. It also owns an 86% interest in Colorado Interstate Gas Co.

El Paso is the parent company and has a market capitalization of approximately $15 billion, a PE of approximately 29 and a dividend yielding approximately 0.2%. El Paso Pipeline Partners has a market capitalization of approximately $7 billion, a PE of approximately 15 and a dividend yielding approximately 5 percent.

Following the close of the transaction, El Paso will become a subsidiary of Kinder Morgan Inc. (the parent company). According to the press release, Kinder Morgan Inc. intends to sell all of El Paso's natural gas pipeline assets to Kinder Morgan Energy Partners or El Paso Pipeline Partners over the next few years. Each of these transactions will be subject to approval by independent directors of Kinder Morgan Energy Partners or El Paso Pipeline Partners.

By the end of 2015, Kinder Morgan Inc. expects its assets to consist almost exclusively of its general partner interests and ownership interests in Kinder Morgan Energy Partners, El Paso Pipeline Partners and Kinder Morgan Management. At that time, it is expected that 80% of Kinder Morgan's cash flows will come from the general partner interests and the remainder from its limited partner interests.

Until 2016, Kinder Morgan Inc. expects to generate more cash flow than necessary to support the expected dividend stream, which is projected to grow at an average annual rate of 12.5%. They will use any excess to pay down debt.

By 2016, it appears Kinder Morgan will have four publically traded entities: Kinder Morgan Inc., Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners. What is not clear is the ultimate allocation of assets. That lack of clarity introduces risk for investors, particularly in the partnership interests.

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