Kinder Morgan Deal Delayed; Risk Heightened

A delay in the leveraged buyout of the general partner raises the risks in sell recommendations Kinder Morgan Inc. (KMI), Kinder Morgan Energy Partners (KMP) and Kinder Morgan Management LLC (KMR).

The transaction did not occur during the first quarter as contemplated largely because of outstanding issues before the California Public Utilities Commission [CPUC] and the U.S. Court of Appeals for the D.C. Circuit. Among the issues is whether it is in the public interest that a general partner should be able to recover in regulated transportation rates a “tax” in lieu of and in excess of income taxes at rates that exceed 50% (see chart below).

The potential damages are so high that the users of Kinder Morgan’s West Coast oil pipeline implore the CPUC to withhold approval of the buyout of the general partner for fear that the general partner would declare bankruptcy to avoid paying a court judgment. The proposed buyout would pile debt on top of debt, giving weight to the bankruptcy risk.

Meanwhile the partnership’s accounting statements that continue to mask dilution cause analysts and journalists to overstate cash flow valuation and understate risk, we believe. As KMP and KMR report first quarter 2007 financial results on April 18 after the close, the general partner announces its intention to transfer a Canadian pipeline to the limited partnership. We think the deal smells because the limited partners pay the general partner, KMI, full price for the non-arms-length transaction while the general partner retains the cash flow associated with the 65% “GP tax” without fully reporting the negative accounting impact.

Originally published on April 18, 2007

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Kinder Morgan's $22 Billion Sale Clears Final Regulatory Hurdle

By Victor Epstein

May 24 (Bloomberg) -- Kinder Morgan Inc.'s $22 billion sale to a private investment group that includes founder Rich Kinder won the approval of California regulators today.

The California Public Utilities Commission approved the deal unanimously, said Commission spokeswoman Susan Carothers. The sale has been in the works since last year.

Besides Kinder, 62, Washington-based Carlyle Group and New York-based Riverstone Holdings LLC, the investor group purchasing Kinder Morgan includes the private equity units of Goldman Sachs Group Inc. and American International Group Inc., also based in New York.

``That was the final regulatory approval,'' Larry Pierce, a spokesman for Kinder Morgan said in a telephone interview. The company has previously stated that it expects the deal to close in the second quarter.

The sale won U.S. antitrust clearance in January on condition that two of the buyers become passive investors in rival pipeline operator Magellan Midstream Partners LP. The two private funds in the investor group, Carlyle and Riverstone, agreed to end their management control of Magellan in favor of that company's other major investor, Madison Dearborn Partners.

To contact the reporter on this story: Victor Epstein at [e-mail]

Last Updated: May 24, 2007 17:45 EDT