energy - Simmons & Company

ENERGY Investors like Kinder Morgan move Company will be No. 3 among energy giants By Collin Eaton August 11, 2014 |Updated: August 11, 2014 10:44pm

Kinder Morgan's network of pipeline and energy storage companies gained $13.6 billion in market value Monday as investors embraced its plan to consolidate into a single corporate behemoth. Patrick Semansky/STF

Stock gains during the day moved the four companies involved in the merger to a combined

Kinder Morgan's network of energy storage and transportation infrastructure includes this coal terminal in Newport News, Va. (AP Photo/Patrick Semansky)

value of $105.8 billion, moving Kinder Morgan into the No. 3 spot among U.S. energy corporations, behind only Exxon Mobil Corp. and Chevron Corp. and one rung ahead of Houston-based ConocoPhillips. Company founder Richard Kinder's personal stake in the enterprise rose from $8.8 billion to$9.6 billion, making Houston's wealthiest resident even more flush. The stock surge came after Kinder Morgan's Sunday announcement of the $44 billion cash and stock deal to join the companies under the single Kinder Morgan Inc. corporate banner. In making the move, Richard Kinder is abandoning a corporate strategy that he revolutionized in the 1990s and used over two decades to build his $325 million company to its size today. "The increase in the stock price is how he makes money, so he is totally aligned with shareholders," said Nick Cacchione, an analyst with research firm IHS. "I think that speaks volumes about this move."

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Investors like Kinder Morgan move - Houston Chronicle

Enron connection In the 1990s, shortly after he was passed over for the top job at ill-fated Enron - then one of Houston's most powerful companies - Kinder bought out one of the firm's small side businesses. It managed pipelines, a staid but steady corner of the oil and gas industry less appealing to Enron's leadership than its flashy energy trading activities. Today, Enron is gone, and the Kinder Morgan pipeline empire remains. As investors and analysts absorbed Sunday's news, they speculated about what it would mean for an industry that's angling for profit in the transportation needs arising from the North American shale production boom. Kinder Morgan is by far the pipeline industry's biggest player, and in a conference call Monday, Kinder signaled the restructured corporation will be on the lookout for potential acquisitions and infrastructure construction projects. Kinder said the company will be able to shop for a broader range of potential purchases because it no longer will be constrained by the legal requirements of its old corporate structure, which favors assets that provide steady income streams, such as pipelines and storage tanks. Combining the companies into a more conventional structure also means it can spend more of the money it brings in on projects and purchases. Kinder said the company is so big that virtually any kind of infrastructure that moves hydrocarbons across the country or stores them fits with its business. "We'd be looking at any entity that is complementary to our assets and our business," he said. "We want to stick to our knitting, though. We're not going to start buying truck lines or railroads, but we have a lot of optionality." Lately, Kinder Morgan had been hamstrung by the law of large numbers, said Mark Reichman, an analyst with Simmons & Company International. "There's a lot of opportunity both in organic growth and with acquisitions, but Kinder Morgan has probably been the most frustrated and faced with the most skepticism on the outlook for its growth," Reichman said. He said Kinder Morgan's Houston rival, Enterprise Products Partners, has been growing faster after it opted to buy its parent company in 2010 and end the requirements on inter-company payments of cash.


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Investors like Kinder Morgan move - Houston Chronicle

The requirement is central to master limited partnerships, the corporate structure of Enterprise Products Partners and the one that Kinder used to operate its main pipeline and terminal assets for 17 years. MLPs are geared to funnel cash to investors and are required to send payments to controlling entities called general partners. Those payments, known as incentive distribution rights, begin small but grow as a partnership does. Eventually, the arrangement can swallow half of every dollar an MLP collects from its operations, as has become the case with Kinder Morgan Energy Partners, the larger of two MLPs involved in the Kinder Morgan transaction That raises the partnership's capital costs, potentially constraining investment and growth "The larger they get, the harder that becomes," Cacchione said. "They could have the best deal in the world come across their desk, and they can't do it." Rabbit out of hat Jason Stevens, an analyst with Morningstar, said Kinder Morgan has struggled with the high cost of its intercompany payments for a decade, and "there are only so many rabbits you can pull out of a hat." One of those rabbits was Kinder Morgan's $21 billion acquisition of El Paso Corp. in 2012. The resulting subsidiary, El Paso Pipeline Partners, is also a master limited partnership that Kinder Morgan Inc. plans to acquire in the consolidation, which it expects to close this year subject to shareholder and regulatory approval. The fourth company in the deal is Kinder Morgan Management, which holds a stake in Kinder Morgan Energy Partners.

The four entities involved in Kinder Morgan's planned consolidation rose sharply in Wall Street trading Monday: Kinder Morgan Inc.: $39.39, up $3.25 Kinder Morgan Energy Partners: $94.12, up $13.78 El Paso Pipeline Partners: $40.56 up $6.96 Kinder Morgan Management: $95.42, up $18.40


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