Many companies in the midstream talk about diversity in terms of assets and income, but few tout the diversity of their investment structures. One of the few that offer multiple investment possibilities is Kinder Morgan, which has two master limited partnerships (MLPs): Kinder Morgan Energy Partners (NYSE: KMP) and El Paso Pipeline Partners (NYSE: EPB), as well as two traditional corporate stocks: Kinder Morgan Inc. (NYSE: KMI) and Kinder Morgan Management LLC (NYSE: KMR).
“The reason for [this investment diversity] is to alleviate some of the administrative burdens and some of the tax issues associated with MLPs and allow institutions to invest,” Kim Dang, chief financial officer at KMP, said during last month’s National Association of Publicly Traded Partnerships’ MLP Investor Conference in Stamford, Conn.
These four publicly traded entities combined have a $115-billion enterprise value with a focus on stable fee-based assets in order to control costs, she said. “This is about delivering growth to our investors. It is not our money; it is the investors’ money so you will not see any sports stadiums with our name on it. We don’t have any sports tickets. When we acquire companies, we get rid of their sports tickets. We don’t have any corporate jets, there are no special executive pension plans or SERPs [supplemental executive retirement plans], and so our job is to minimize the cost and to return the money to our investor.”
This fiscal discipline has led Kinder Morgan to meet its budget in 12 of the past 13 years, and the year they missed the budget was by 2 cents, according to Dang. She anticipates Kinder Morgan to end this year at nearly four times debt to EBITDA. Since the current management was put in place in 1997, KMP has generated a 25% compound annual growth rate for investors. KMR has generated a 16% compound annual return since its initial public offering in 2001, and KMI has generated an 18% compound annual return since returning to being publicly traded in 2011.
Although Kinder Morgan will make acquisitions, most notably the May 2012 acquisition of El Paso for $21 billion and this year’s $5 billion merger with Copano Energy, the company prefers to grow by leveraging its existing asset base. Kinder Morgan’s current asset base has made it the country’s largest transporter of natural gas, independent transporter of petroleum products, transporter of CO2 and independent terminal operator.
The company has a backlog of $13 billion in growth projects, including a plan to work with Royal Dutch Shell Plc (NYSE: RDS-A, RDS-B) to build a liquefied natural gas (LNG) export terminal at Elba Island near Savannah, Ga. This facility will only export volumes to countries that the U.S. has free trade agreements with, so it will not require approval from the Department of Energy. In addition, Kinder Morgan is also considering a project to export volumes from Gulf LNG.
Additional growth projects are being driven by increased demand for natural gas in Mexico and the Southeast United States, as well as transportation demand for condensates and natural gas liquids (NGL) and Canadian oil sands production. The increase in oil sands production, along with coal exports, are also driving demand on the company’s terminal side, primarily along the Houston Ship Channel, Cushing, Okla., and Edmonton.
Dang said that Kinder Morgan remains conservative with its spending for projects as the company needs to earn at least 300 basis points above its cost of capital with a lower-risk profile. “Our cost of capital is 9%. We are not going to go out and do a project in 9.5% or 10% because there is just too much potential for changes in what you expect to happen and what actually happens and can result in that project not being as good. It could be much better, but we’re not going to take the risk to have a project come in at or below our cost of capital.”
Photo by Bloomberg.