KN Energy Board Hands Reins to Kinder Morgan
Recent basement-dweller KN Energy electrified the energy
industry Friday, announcing what one analyst called the deal of the
decade - a marriage with the brains and bucks of Houston's Kinder
Morgan Inc. KN's Chairman Larry Hall immediately resigned, Kinder
Morgan Chairman Richard D. Kinder, credited with helping build
Enron's underpinnings, was named heir apparent, and KN's stock
price soared nearly 55% in one day.
Kinder told a teleconference he plans to "get the car out of the
ditch and get it going down the highway." One industry veteran was
excited to hear "Kinder's rejoining the industry," after leaving
Enron in 1996 when Chairman Ken Lay announced he would lead the
company for another five years.
It was less than three weeks since KN's proposed $6 billion
merger with Sempra Energy fell apart. The new alliance will create
a massive midstream energy company with 30,000 miles of gas,
petroleum products and liquids pipelines, and an enterprise value
of $8.5 billion.
According to the agreement, KN Energy would issue 41.5 million
shares of KNE stock in return for all of the outstanding shares of
Kinder Morgan, Inc. (ENP). Considering share prices at the time of
the announcement Thursday, the deal would be valued at $654
million, including $140 million in debt.
Kinder had been a board member of KN until just a few weeks ago.
Upon closing he will be named chairman and CEO of the combined
entity, which will be known as Kinder Morgan Inc. Stewart Bliss, an
independent member of the KN Energy board, has assumed the chairman
and CEO positions on an interim basis. A KN spokesman said the
transaction and subsequent executive changes were KN "board
"Larry was instrumental in growing the company's assets from
$300 million to $8 billion in the '90s," said Bliss. "He built a
strong asset base, and we are confident that Rich Kinder has the
industry expertise, vision and leadership to take the combined
entity to the next level and position the company among the leaders
in the energy industry." Kinder has 20 years experience in the
industry, 16 of which were spent at Enron and six of which were
spent as Enron's president and COO.
Something drastic was needed at KN after two warm winters,
continued struggling with integration of the MidCon's assets
purchased in December 1997, significant underutilization of Natural
Gas Pipeline Co.'s capacity and the failure of the Sempra merger.
Bliss said the deal will be immediately accretive to earnings.
"[It] deleverages our balance sheet by reducing our debt to total
capitalization ratio from 72% to approximately 65%, enhances the
quality and stability of future earnings, improves cash flow to
fund future growth, strengthens our already strong midstream asset
base, and provides outstanding leadership from Rich Kinder, an
industry veteran with a proven track record." KN and Kinder Morgan
expect to close the transaction early in the fourth quarter. The
closing is subject to regulatory and shareholder approvals.
The marriage stunned analysts. "I'll be honest with you. I
really didn't anticipate this one," said Dain Rauscher Wessels'
analyst Mark Easterbrook. "I thought it would be a long recovery
for KN, at least 12 months. This is a win-win situation for both
Kinder Morgan unit holders and KN shareholders. It will bring KN
shareholders back from the doldrums. These guys have been
slaughtered in the last 12-18 months and now things are starting to
look up. They are bringing in one of the premiere pipeline
operators in Rich Kinder to run these pipelines that have not done
Merrill Lynch's Donato Eassey was awestruck following the
announcement. "This is an absolute home run. If it's not the
transaction of the 1990 decade, I don't know what will be," he
"Any time you get a situation where a stock is beat up and so
out of favor as this one [KNE] was, smart people are going to
figure out where the value is. Certainly one of the best in the
industry figured it out in a hurry and took full advantage of it.
It truly is a transaction that stands out. It's very unique. It is
not complex. It borders on genius," said Eassey.
"Richard Kinder and Bill Morgan, these are smart guys and they
know those assets well. Kinder used to run some of those assets
when he was at Enron. In my view Kinder had a great deal to do with
building an extremely solid foundation at Enron, and he'll take
that same expertise with these assets and build them very nicely,"
he added. "They are getting [KN] at the very bottom potentially."
During a conference call, Kinder said he resigned as a KN board
member after the Sempra deal collapsed "because I thought there was
some possibility of putting together a transaction. We started
meeting and with the help of the leadership of KN we were able to
put together this arrangement. I think one of the real positive
things that I have believed all along is that people ought to put
their money where their mouth[s are], and when this combination is
completed Bill Morgan and I will own about 30% of the stock of the
combined company. I personally will own a little over 22% of the
company so you better believe I am going to be focused like a laser
on shareholder value."
KN has a long way to go however. Back-to-back warmer than normal
winters took a big bite out of KN earnings and coupled with the
cancellation of the Sempra merger have crippled KN share prices.
Hall announced last month the company expected to experience a loss
of $0.20-$0.25 per share in the second quarter of 1999 and likely
would break even or post a modest gain of $0.10 per share for the
year. That compared with analyst's forecasts of $1.07/share. KNE
shares have plummeted from a 52-week high of near $40/share to
$12.19/share July 5. On Friday they rocketed to nearly $19/share.
"Kinder won't take [warm winters] as an excuse for no earnings,"
said Eassey. He has had a very successful track record since taking
over Enron Liquids Pipeline (renamed Kinder Morgan Energy Partners
LP) in February 1997. The company has provided a 209% total return
to shareholders since that time. It had $17.7 million in net income
in 1997 and expects $170 million in net income this year.
Taking Advantage of the MLP
Kinder Morgan Energy Partners LP is the nation's largest
pipeline master limited partnership. The MLP is considered by many
investment bankers and major pipeline companies to be a smart
method of growing a pipeline business because it avoids a
significant tax burden and more of the cash generated falls to the
public unit holders. Several other major energy companies are
taking advantage of those benefits, including Enron with Northern
Border, Duke Energy with Teppco and El Paso with Leviathan. Kinder
was ecstatic about the prospect of putting an MLP pipeline and a
traditional pipeline corporation under one roof.
"This is a unique combination. You are putting a major MLP
together with a major midstream regular corporation because you are
able to take assets [some of KN's assets] and put them down tax
free at fair market value into that MLP. That MLP is a very
advantageous owner of the assets because it does not pay tax," said
Kinder. "We think there are going to be significant assets in the
KN family that will qualify for and fit the MLP. We can't identify
those yet. But when we do that, we'll get the same price as if it
were sold to a third party but because we own the general partner,
we'll get the general partner's share of that MLP revenue, which in
the case of Kinder Morgan is about 30%.. And you are still
controlling the asset. It's a wonderful combination that I think is
going to work very well for the combined company."
The companies announced that management intends to focus on
expanding KN's asset base, selling non-strategic assets to reduce
KN's level of outstanding debt and making strategic acquisitions,
both on its own and in conjunction with Kinder Morgan Energy
Partners. In addition, the combined company will contribute assets
to Kinder Morgan Energy Partners in exchange for cash and/or
publicly traded limited partnership units. Any transfers of assets
will be made for fair value and only on an accretive basis, the
companies said. The combined company will continue to share in the
earnings of these assets through its limited and general partner
interest in Kinder Morgan Energy Partners.
Kinder Morgan Energy Partners LP has an enterprise value of $2.5
billion. It owns and operates one of the largest product pipeline
systems in the U.S., serving customers in 16 states with more than
5,000 miles of pipeline and over 20 associated terminals. It also
operates 24 bulk terminal facilities which transload over 40
million tons of coal, petroleum coke and other products annually.
In addition, Kinder Morgan owns 51% of Plantation Pipe Line, 20% of
Shell CO2 Co. Ltd. and a 25% interest in an NGL fractionator.
KN, based in Lakewood, CO, is the nation's sixth largest
integrated gas company with more than $8 billion in total assets
and is one of the largest pipeline operators with more than 25,000
miles of pipe. It has operations in 16 states.