Kinder Morgan, Inc. (KMI) completed its initial public offering Friday, February 11, 2011, marking the return to the public equity markets of the company controlling one of the largest pipeline master limited partnerships, Kinder Morgan Energy Partners, (KMP). The IPO was a success, raising $2.86 billion, with an offering of 95.5 million shares, 15.5 million more than originally planned. The shares rose 3.5%, to $31.05 in their first day of trading. The IPO was the largest in the energy sector since the $4.4 billion offering of Conoco-Philips (COP) in 1998. The success of Kinder Morgan, Inc.’s IPO is a hopeful sign for the other private-equity deals done, like KMI’s, during 2006 and 2007, before the recently ended long recession. Analysts hailed the offering as an opportunity for investors, including institutional investors, to get a share of the Kinder partnership’s steady cash flows and attractive distributions, without the tax complications of owning limited partnership units.
But investors in KMP (the MLP) and potential investors in KMI (the corporation) should be asking themselves what the IPO suggests about future strategy at the Kinder Morgan family of companies. On its face, the KMI IPO would seem to be at odds with the trend in the energy MLP sector of the limited partnerships acquiring their general partners. In the past two years, leading MLPs Enterprise Products Partners (EPD), Buckeye Partners (BPL), and Magellan Midstream Partners (MMP), among others, took over their general partners, or the entities controlling their general partners. The reasons for doing these deals are several, including simplifying the MLPs’ corporate structures, lowering cost of capital, and eliminating costly incentive distribution payments (IDRs) to their general partners.
One clue about strategic thinking at Kinder can be found in the IDR payments that KMP makes to its general partner; KMP pays nearly 45% of all of its distributions to its general partner, a far higher rate than at other leading MLPs. Kinder (and now KMI) management emphasize that the general partner can (and it has in the past) waive these payments in part to help foster growth at the MLP. The problem for KMP investors is that these waivers are not guaranteed.
It would seem that, among Kinder executives, the emphasis is on building a suitable vehicle for institutions to gain exposure to Kinder’s businesses (institutions generally do not invest in MLPs for a variety of reasons). Kinder had attempted to create another stock vehicle for institutions to invest in, KMR, but that issue regularly traded at a discount to KMP, creating a drag on KMP’s capital cost (since it issues shares to KMR as a distribution). Thus, the reissue of KMI is likely aimed, in part at giving institutions a better vehicle with which to invest in Kinder and should lead to the disappearance of KMR.
All this means that Kinder Morgan Energy Partners, the MLP, will likely have to contend with comparatively high capital costs and burdensome IDR payments for the foreseeable future.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.