When Kinder Morgan Inc. (
) received the approval for the El Paso acquisition earlier in the
year from the Federal Trade Commission (
), but it came under the condition of selling some of its natural
gas pipelines to
Kinder Morgan Energy Partners
). According to the recent press release, KMP has agreed to acquire
100% assets of Tennessee Gas Pipeline (
) and a 50% interest in El Paso Natural Gas (EPNG) pipeline for a
purchase consideration of $6.22bn. The sale will be in effect from
August 1, 2012. Let's look at the implications of the sale over
We currently have a
price estimate of $90 for Kinder Morgan
, implying a 15% premium to the current market price.
See our complete analysis for Kinder
Morgan Partners here
Change in capital structure
As a part of the purchase, KMP will assume a $2.36 billion of
debt - $1.8 billion from TGP and $560 million from EPNG. Of the
rest of the consideration which stands at $3.86 billion ($6.22
billion net of $2.36 billion), 10% i.e. $387 million will be met by
equity transaction in KMP units to KMI, and remaining by a new $2
billion credit facility, and issuance of equity and debt. So, there
is a net addition of $4.36 billion to debt and rest $1.47 billion
will be raised through a combination of equity and debt issues.
However, the company is about to sell some of its natural gas
pipeline and processing assets later during the quarter, the
proceeds from which will be used in paying off the $2 billion
short-term credit facility. We are at the moment unsure of what
will be the final standing of cash and debt position after the
execution of all the transactions, but by the end of Q3 we will
have a fair idea, when all transactions are expected to be
Natural gas pipeline operations
TGP is a 13,900 mile long pipeline tha3t transports natural gas
from Louisiana, the Gulf of Mexico and south Texas to the
northeastern United States, including Boston and New York City. It
has a capacity of 7.5 billion cubic feet (bcf) per day. EPNG is a
10,200-mile pipeline that transports natural gas from the San Juan,
Permian and Anadarko basins to Texas, California, and northern
Mexico. It has a design capacity of about 5.6 bcf/day. These
pipelines together have a capacity to add up to 13.1 bcf/day.
However, one needs to be aware of the fact that company will
execute sales of some of its existing natural gas pipeline assets
by the end of Q3 as was mandated when FTC granted approval for the
KMI- El Paso acquisition.
We previously discussed the asset sales KMP will need to execute
post KMI-El Paso merger in the article What The KMI-El Paso Merger
Means To KMP. Collectively, all of these transactions are a part of
the KMI-El Paso deal, but they are largely aimed at keeping the
cash flow from natural gas pipeline operations constant for KMP.
So, we believe that there would not be any material impact of these
transactions on operation. However, the incoming assets are more
attractive than the outgoing ones.
TGP has access to the Marcellus and Utica shale plays, where gas
exploration activity has and hence, that offers tremendous growth
opportunities. Several other expansion projects with more than $600
million of investment are coming up on these two pipeline systems,
which will add supplemental value to the company. The largest
investment is in TGP's Northeast Upgrade Project at $440
million and is likely to be in service by November 1, 2013.
This project will boost capacity by 636,000 million Btu/d and
provide additional capacity out of the booming Marcellus Shale.
How a Company's Products Impact its Stock Price at