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What Kinder Morgan Consolidation Means For Income Investors

kinder morgan

Last week, Kinder Morgan Inc. (KMI) announced that it will acquire all of the outstanding equity securities of Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR), and El Paso Pipeline Partners, L.P. (EPB), thereby creating the largest energy infrastructure company in North America.  For investors less familiar with Kinder Morgan’s organizational structure, the following slide from the presentation that accompanied the acquisition announcement should be of use:

kinder morgan consolidation


What does this consolidation into the largest energy infrastructure company in North America mean for income investors?  In particular, there are three things worth noting.

  1. Kinder Morgan is eliminating the two master limited partnership (MLP) structures that existed for KMP and EPB.  The company notes that by simplifying its corporate structure into one equity class, there will be significant income tax savings over the coming years.  Additionally, eliminating the master limited partnerships should be a positive event from a credit standpoint, since MLPs are required to distribute cash flows to investors.
  1. The combined entity will have cross-guarantees on its debt.  The guarantees, which will be “absolute and unconditional,” will be among KMI, KMP, and “all significant EBITDA-generating subsidiaries.”  EPB is going to be acquired by KMP—hence there are no cross-guarantees involving EPB specifically.  Moreover, by consolidating, Kinder Morgan will eliminate the subordinated debt structure that currently exists and will have what is expected to be one investment grade credit rating (albeit on the low side of investment grade).
  1. Investors focused on dividend growth may find KMI’s future projected dividends of interest.  In the presentation accompanying the acquisition announcement, Kinder Morgan announced the following projected dividends through 2020: $2.00 (2015), $2.20 (2016), $2.42 (2017), $2.66 (2018), $2.93 (2019), $3.22 (2020).  Assuming KMI can at least meet its dividend projections, in 2020, the yield on cost, based on the share price at the time this article was written, would be over 8.00%.  Furthermore, there is a history of Kinder Morgan beating its budgeted dividend amounts.

If you are an income-focused investor looking for interesting investment opportunities to research further, Kinder Morgan is worth a bit of your time.  With several CUSIPs among the company’s intermediate- to long-term debt yielding in the 3.50% to 5.35% range, and the stock’s projected future yield on cost of over 8.00%, there are noteworthy opportunities at various levels of the capital structure.    On a final note, keep in mind that this article is for informational purposes only.  Prior to making any investment, you should conduct your own extensive due diligence.

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