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Kinder: Dropdowns, Divestitures Accretive in 2013
Kinder Morgan Energy Partners (KMP) expects to complete during the third quarter the sale of pipeline and gas processing assets it agreed to let go in order to win antitrust approval for Kinder Morgan Inc.’s (KMI) acquisition of El Paso Corp. Plenty of prospective buyers are sniffing around, CEO Rich Kinder told financial analysts during an earnings conference call last week.
Up for sale are Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Co, KMI’s Casper-Douglas gas processing and West Frenchie Draw treating facilities in Wyoming and a 50% stake in the Rockies Express Pipeline (REX).
“We’ve already sent the detailed books out to these people [who have signed confidentiality agreements], and we will start getting responses to that in the next few weeks, and they will know more about exactly what they plan to do,” Kinder said. “I think it’s fair to say that in the people who signed up to get the books, they are numerous, that there’s some strategic players and some financial players, and we would expect a spirited bidding contest, and we’ll just see where it heads.”
At the time the assets to be sold were announced, one analyst wrote that the “only meaningful” buys were the 50% stake in REX and KMIGT, not because of what they are now, but what they could become. “…[W]e believe the potential value of REX as a Marcellus [Shale] pipeline and the potential conversion of KMIGT to crude service will enable KMI to get a solid valuation for their pipes, even in today’s challenging gas pipeline market,” wrote Tudor, Pickering, Holt & Co.’s Bradley Olsen (see NGI, March 19).
In order to replace revenue from the KMP assets being sold, Kinder said KMI would drop down El Paso assets. “…[W]e expect to offer to KMP all of Tennessee Gas Pipeline and a portion of El Paso Natural Gas,” Kinder said. “We hope to close that transaction, or dropdown, contemporaneously with the close of the divestiture of the KMP assets.”
Analysts at Tudor, Pickering, Holt & Co. said in a note Thursday, “This is a BIG announcement for KMI as well [as] KMP. We estimate the equity stakes of these pipelines to exceed $5 billion, driving rapid paydown of debt at the KMI level.”
Kinder also said El Paso has offered to sell its remaining 14% of Colorado Interstate Gas and all of Cheyenne Plains Pipeline to El Paso Pipeline Partners. “We expect that dropdown to close contemporaneously with the close of the KMI-El Paso transaction, and we expect it to be immediately accretive to the distribution per unit at El Paso Pipeline Partners,” Kinder said. He promised that the combination of dropdowns and divestitures will be neutral to KMP in 2012 and accretive in 2013 and thereafter.
Elsewhere in the business, Kinder said the effects of producers’ migration to liquids-rich and oil plays are being felt. “…KinderHawk [Field Services] is not seeing the volumes we would have thought we would have seen in our budget year to date,” Kinder said. KinderHawk is the company’s former joint venture with Petrohawk Energy Corp., which it fully acquired last May (see NGI, May 9, 2011). “On the other hand, it’s still above the acquisition plan numbers that we had when we made the acquisition of the second half in the middle of 2011,” he said of KinderHawk’s performance.
However, in the Eagle Ford the company is partners with BHP Billiton Petroleum by virtue of the latter’s merger with PetroHawk. “That rig count [in the Eagle Ford] is increasing rapidly, and we think it will continue to increase throughout 2012 and certainly beyond,” Kinder said.
And beyond that, the company’s fortunes will likely be lifted by exports of liquefied natural gas (LNG) from the Gulf Coast, should that come to pass, Kinder said. “…[W]e have extraordinarily good connectivity to those plays that would be providing the natural gas to be liquefied and to the terminals where the liquefaction would be done,” Kinder said. “…[W]e will take advantage of our interconnecting pipelines if and when these projects get built.”
KMP reported first quarter distributable cash flow before certain items of $462 million, up 21% from $382 million in the first quarter of 2011. Distributable cash flow per unit before certain items was $1.37, compared to $1.21 for the first quarter last year. Net income before certain items was $534 million, compared to $424 million for the same period in 2011. Including certain items, net income was $208 million, compared to $341 million a year ago. Certain items for the first quarter totaled a net loss of $326 million, versus a net loss of $83 million for the same period last year. Most of the items were attributed to remeasuring discontinued operations to fair value on the assets to be divested for acquiring El Paso.
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