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King of the pipe

by Claire Poole  |  Published November 19, 2012 at 1:37 PM
When Houston energy transportation giant Kinder Morgan Inc. announced in October 2011 that it had agreed to buy El Paso Corp. for $21 billion, CEO Rich Kinder called it a "once-in-a-lifetime transaction."

He wasn't kidding. The deal produced the country's largest transportation network for natural gas, which is being plumbed all over the U.S. with new technologies such as hydraulic fracturing and horizontal drilling. It made the company well positioned to be the premier handler of what's being hailed as the most clean, cost effective energy source for the United States.

Some analysts had their doubts about the deal with natural gas prices in the toilet -- no rise in sight -- versus much higher relative oil prices. But Kinder was clearly looking at the acquisition long term, when natural gas would become the main energy source of the United States. "This transaction shows KMI's [Kinder Morgan Inc.'s] confidence that domestic natural gas will play an increasingly crucial role in the North American energy market for many years to come," Global Hunter Securities Inc. analyst Dan Morrison wrote at the time of the deal's announcement.

El Paso was just the latest in a string of acquisitions, from pipelines to product terminals to processing assets, that have made Kinder Morgan the largest midstream company and the third-largest energy company (based on enterprise value) in North America. It was the company's strong management team and its skills at making strategic acquisitions that led survey respondents to name Kinder Morgan as the Most Admired Corporate Dealmaker in energy, surpassing equally impressive, acquisitive companies such as Apache Corp., Occidental Petroleum Corp., Enterprise Products Partners LP and Energy Transfer Equity LP. "Rich Kinder has an effective vision and philosophy," said one respondent in the survey.

The Kinder Morgan companies include Kinder Morgan Inc., or KMI, and Kinder Morgan Energy Partners LP, or KMP. Both are publicly traded, but Kinder Morgan Inc. owns the general partner of KMP, Kinder Morgan GP Inc. With the El Paso deal, KMI also picked up a 43% limited partner share and 2% general partner share of El Paso Pipeline Partners LP, or EPB.

KMI uses KMP as an acquisition vehicle because of its tax advantages as a master limited partnership (it doesn't pay corporate taxes), which gives it a lower cost of capital, allowing it to pay higher prices for acquisitions. Over the past five years, those acquisitions have included Crosstex Energy Inc.'s natural gas treating business in 2009 for $266 million ("We are pleased to have the opportunity and financial strength to grow our company even during difficult economic times," Kinder said at the time) and half of the natural gas gathering and treating business in the Haynesville Shale of Petrohawk Energy Corp. in 2010 for $875 million. (It bought the other half the year after along with some Eagle Ford assets for $920 million.)

It bought ethanol-handling terminals in Baltimore, Dallas and Linden, N.J., from U.S. Development Group, also in 2010, for $195 million, and SouthTex Treaters Inc., a manufacturer, designer and fabricator of natural gas treating plants owned by the Morrow family, this past year for $155 million.

But KMI also has used KMP as a place it can "drop down," or sell, assets when it wants to generate cash, as it did in 2007, when it handed over the Trans Mountain Pipeline System -- the only oil sands pipeline serving the West Coast -- to KMP for $550 million. (The sale took place after KMI was taken private in a $22 billion leveraged buyout by management and several private equity groups, including Goldman Sachs Capital Partners and the Carlyle Group.)

After re-emerging as a public company in 2011 (in the largest buyout-backed initial public offering ever), KMI did another drop down to KMP in August, when it sold it the Tennessee Gas Pipeline and half of the El Paso Natural Gas pipeline for $6.2 billion. In that case, the sale was to replace cash flow from assets KMI was selling as part of its agreement with the Federal Trade Commission to complete the El Paso Corp. acquisition.

David Kinder, who heads up development and investor relations for the company and is its treasurer (as well as Rich Kinder's nephew), wouldn't agree to an interview unless the company could review the article before it was published, which The Daily Deal refused. But he did respond to questions via e-mail.

David Kinder, 37, who graduated cum laude from Texas Christian University with a bachelor's degree in business administration in finance, has worked at Kinder Morgan since 1999 in development. He oversees a staff of five who work on acquisitions and divestitures, a team that has remained small despite the company's growth. He reports to the office of the chairman, which includes his uncle, president Park Shaper and COO Steve Kean.

He said his team works with each business unit president and his or her team to review potential acquisitions. The deals they select are then put before his uncle, Shaper and Kean for discussion and approval. The company doesn't have a separate integration team, preferring for development to work with different individuals within each business unit and the corporate function areas. For instance, Kean is heading up the integration of El Paso.

Kinder Morgan doesn't work with an M&A playbook, he said, but it does have financial plans for each acquisition, the main metric being the distributable cash flow the business generates. It tracks the success of transactions weekly in its earnings meetings and does an annual review with its board to compare actual financial results versus the acquisition plan. "We have had a pretty good track record of beating our acquisition plans," he boasted in the e-mail.

Kinder wasn't specific about what lessons he has learned from past deals, only saying, "I learn something new from each deal and I try to apply it to the next deal to make each incremental acquisition more successful."

Kinder said the company began evaluating buying El Paso in the summer of 2011. He was involved from the onset with the rest of the senior management team, noting that his uncle and Shaper "were very involved in the negotiation of the transaction." The two sides agreed on terms in October and they closed the deal in May 2012.

He wasn't specific about the wrinkles of getting the deal signed and closed, writing, "In a deal of this magnitude there will always be complexity and challenges. But we worked through it and are happy to have it done."

The challenges were immense. To get the FTC to agree to the deal, KMP had to sell a big chunk of assets in the Rockies, including Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Co., the Casper-Douglas natural gas processing and West Frenchie Draw treating facilities in Wyoming and the 50% interest in the Rockies Express Pipeline. The buyer: Tallgrass Energy Partners LP, owned by private equity firms Energy & Minerals Group and Kelso & Co. and management, which last August agreed to pay $3.3 billion.

But that's not all. Shareholders sued El Paso CEO Doug Foshee for violating his fiduciary duty because he was negotiating to buy El Paso's exploration and production unit at the same time as he was charged with getting the highest possible price as a seller of the entire company. (The unit ended up being sold to the Apollo Global Management LLC for $7.15 billion.)

Chancellor of Delaware's Chancery Court Leo E. Strine Jr. criticized the move in February but refused to stop a shareholder vote on the sale, saying that Kinder Morgan was unlikely to be found an aider and abettor of the alleged violations of fiduciary duty by Foshee. "It bargained hard, as it was entitled to do," he wrote.

David Kinder wasn't specific about what the company is looking at down the road, saying it will consider new acquisitions "both large and small" in all of its business segments. But the company has plenty to do, even without acquisitions.

In October, Rich Kinder said on a conference call with analysts and investors that Kinder Morgan had $11 billion worth of expansion projects in various stages of preparation and construction, some with customer commitments and some very close to having customer commitments, the great bulk of which are at KMP. "We continue to pursue additional opportunities," he said, noting a strong increase in natural gas used in electric generation, carbon dioxide used in oil recovery, coal exports and natural gas liquids.

When asked if KMI would do any additional drop-downs to KMP, Kinder deferred to Shaper, who said, "There's not any question that KMI wants to do what's right for KMP. And so KMP and EPB will acquire assets at attractive prices." Knowing Kinder Morgan's track record, it wouldn't do deals any other way.

Tags: Apache Corp. | Carlyle Group | Chancellor of Delaware | Crosstex Energy Inc. | David Kinder | Doug Foshee | Eagle Ford | El Paso Corp. | El Paso Natural Gas | El Paso Pipeline Partners LP | Energy Transfer Equity LP | Enterprise Products Partners LP | EPB | Federal Trade Commission | Goldman Sachs Capital Partners | Haynesville Shale | Kinder Morgan Energy Partners LP | Kinder Morgan GP Inc. | KMI | KMP | LBO | Leo E. Strine Jr. | Most Admired Corporate Dealmaker | natural gas | Occidental Petroleum Corp. | Park Shaper | Petrohawk Energy Corp. | Rich Kinder | SouthTex Treaters Inc. | Steve Kean | Trans Mountain Pipeline System | U.S. Development Group

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Claire Poole

Senior Writer: Energy

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