This well-known energy company is the parent of publicly traded limited partnership Kinder Morgan Energy Partners (NYSE: KMP). The partnership owns a diverse set of midstream energy assets which generate strong and stable cash flow. Through its limited partner and general partner ownership of KMP, Kinder Morgan receives about half of the total cash distributed by KMP, which will allow it to in turn pay an initial $1.16 annual dividend, yielding 4.2% at the midpoint of the IPO range. Kinder Morgan was taken private in 2007 by Goldman Sachs (GS), Highstar, Carlyle and Riverstone, who are now selling all 80 million of the IPO shares, which are expected to price between $26 and $29. The company plans to list on the NYSE under the symbol KMI. Goldman Sachs and Barclays (BCS) are the bookrunners on the IPO.
Business
Kinder Morgan generates almost all of its cash flow from its stake in KMP. KMP's assets consist largely of pipelines transporting carbon dioxide (used in tertiary oil recovery), natural gas, crude oil and refined petroleum products such as gasoline, diesel, jet fuel and natural gas liquids. It also owns associated terminals, processing facilities and handling facilities. While most of these businesses generate fee-based cash flow that is not directly exposed to commodity prices, it also owns eight oil fields in Texas that connect to its carbon dioxide pipelines.
Incentive Distributions
Because Kinder Morgan owns the GP interests in KMP, it receives incentive distributions that magnify changes in KMP's cash flow. For every 5% increase in KMP's per-unit distributions, Kinder Morgan should be able to raise its dividend by 11%. It will also be able to raise its dividend if KMP offers additional units to the public. This leveraged exposure to the underlying assets is one of the key selling points of the IPO.
Key Risks
Although Kinder Morgan has high barriers to entry and its assets generate stable cash flow, there are some risks to the story. On a consolidated basis, the company is significantly levered (6-7x debt/trailing EBITDA) and 52% of its debt is floating rate. The industry is heavily regulated and rates are generally set by the Federal Energy Regulatory Commission (FERC), which keeps organic growth low in most segments. Lastly, it has recently been challenged by FERC to determine whether it has over-collected on rates charged to shippers; although it has reserved some cash to cover this issue, negative findings could force it to lower rates in the future.
High Anticipation
The deal is one of nine on the IPO calendar for this week. Since it was taken private in 2007, Kinder Morgan has been a much-anticipated IPO. Its $2.2 billion expected deal size sets it up to be the largest ever private equity-backed IPO on a US exchange. The most recent GP IPO, Targa Resources (TRGP), is up 42% from its December IPO, which sets the stage well for this deal. Given Kinder Morgan's strong track record and well-regarded management team, there will undoubtedly be high interest in this IPO.
