The exchange would come at the worst possible time, at a terribly low price for EPB units. Any merger requires approval by the independent directors of EPB as well as the approval of the EPB limited partners. To get limited partner approval at these levels, when the company's business hasn't been seriously damaged, would require a lot of misinformation, ignorance, and fear on part of the limited owners. We seem to have a lot of it right now.
I think what would have to happen is that enough long term unit owners are scared out of the MLP, and the units are bought by large funds with the sole purpose of approving a merger as soon as possible at a price that provides a decent short term gain for them, but a needless loss for the other (individual) unit holders who held on.
Hopefully the independent board of directors for EPB will just look forward to 2017. Its not like EPB's business is about to disappear.
I think there are local distribution company (utility) pipelines in just about every city in the country. Selling the natural gas to be used for CNG at retail may be within the jurisdiction of these utilities. Setting up truck refueling stations would seem to need a nationwide footprint for economies of scale. Kinder can let others do it. As long as the CNG is sold, KMI can play a role in getting it to the retailer.
"As far as exporting the NG is concerned, it will be at least a few years before the project is approved and the construction is finished. Where EPB is going to find revenue to fund increased distribution? Where is EPB going to find the funds to do this multi-billion project? "
So obvious a question, yet I am ashamed to say I don't have the answer. Somehow I never imagined that EPB would have to fund a long-term construction project where the essential, life blood, stream of cash flow will not begin to be generated for several years. EPB clearly can't do it.
Has this matter been discussed in the conference calls and analyst meetings? I haven't waded thru all 6 hours of the January analysts day meeting.
The following paragraphs are from today's Seeking Alpha article entitled "Investors Should Stop Worrying About the Attacks on Kinder Morgan":
"Chief among concerns in the Barron's article was understated maintenance capital expenditures and overstated growth capital expenditures. Barron's went on to imply that the purpose of such an understatement was to maximize reported DCF, or distributable cash flow.
Here is how that would work: Since maintenance "capex" is discounted from distributable cash flow, minimizing reported maintenance capex would thereby increase reported DCF. Conversely, because growth capex is not subtracted from DCF, Barron's hinted that management may be counting maintenance capex as growth capex. "
I'm confused about growth capex not being subtracted from DCF. If funds have been expended on a capital project that is classified as "growth," those funds are gone, they have been spent, how can they be included in DCF. The same dollars would be spent in two places; on the capital project and as a distribution to unitholders.
Can anyone provide some clarity?
Odd how these short term traders can toss off the words "merger likely" so effortlessly. Anyone have the foggiest idea what merger is likely?
Liza, nice to read your level headed reply. I would say, however, regarding asset location, that SNG's assets in the southeast serve a user market area, rather than producers in a shale play area. SNG's assets are still useful even when the natural gas supply comes from a new area. There are no shale plays in S. Carolina, Georgia, or Florida. SNG's market is very desirable as far as I can determine.
As for EPB's Rockies pipelines, I haven't been able to find specifics about what problems are being faced there. There is a lot of oil and gas production in Wyoming and Colorado, and that production has to get to markets. CIG has a role to play in that area. And Ruby would seem to provide a necessary outlet from the Rockies toward the west coast.
As Kinder Morgan stresses in its presentations, the shale revolution provides opportunities for Kinder's existing assets. The only pipeline companies in this country that don't have to reposition any of their assets are the smaller gathering companies that have been recently built in the heart of specific shale plays.
Think about KMP's Tennessee Gas Pipeline. It would appear to be terribly disadvantaged because it runs from conventional gas reserves in Texas and the Gulf Coast to Northeast markets. But it is being repositioned to flow Marcellus gas to the southeast in one of its legs. It would become a bi-directional line, and generate greater earnings as a result. In summary, almost all the big interstate pipelines have the "wrong geography" until they are repositioned or have their flow reversed. EPB's assets remain useful and valuable.
Lastly, note the recent The Street article which quoted K-M management in the January analysts conference as saying that any future merger between KMP and EPB would be a decision made by the independent directors of each MLP and by the unitholders of both entities. So an "opportunistic" merger of EPB into KMP and unfavorable prices for EPB unitholders could never be done.
msenny22, as I recall, EP was probably trading in the low $20'S range when the deal was set with KMI in Oct., 2011. the takeout price was about $26 in stock and cash.
My mid $50's call was referring to EPB's probably price right now if El Paso had never merged with KMI, and consequently, all of the dropdowns from EP would be directed toward EPB (the MLP). I was saying that, had the merger never taken place, EP would still be languishing because they'd still have the E&P unit, and management wouldn't have much investor confidence. But the merger pressure would always have be propping up EP's share price.
In answer to your earlier question "what would EP be trading at now, if they hadn't been bought?" They'd have the E&P unit dragging them down. EPB would have more of the pipes and would be trading in the mid $50s. The value would have kept shifting to the MLPO owners, to the EP owners. Yes, KMI got a good deal, but former EP shareholders are better off with KMI. Stock prices advance if stages, fits, and starts. In a few years, KMI will be fully valued again.
El Paso's E&P unit, that Kinder forced them to sell to private equity before the merger, was forced to scale back their IPO a few months ago due to the likely dismal reception that it would have gotten in the market. If the merger with Kinder Morgan hadn't been done, EP shareholders would still be listening to disappointing earnings reports and management's bullheaded adherence to plans that don't work.
Mr. Kinder's recent purchase probably takes any merger issue off the table for any relevant time period. But when EPB's unit price is under pressure due to fear and uncertainty, it would not be a god time for investors to have their EPB units merged into KMP. I'd say, wait until distribution growth resumes.
An "eventual" merger of EPB into KMP would be worse than a distribution reduction. That fear is partially what is driving the unit price ever lower.
I was already overweighted with EPB, but have been buying another 100 units every time the price drops another point. I'd like to see EPB remain a clean (solely) natural gas facility MLP. Kinder could direct a growth project to EPB by selling Ruby to EPB at a price that allows for a small distribution increase. Since Kinder Morgan has to sell more EPB units to finance the Ruby and Gulf LNG acquisitions, Kinder is taking it on the chin right now because the current low price of EPB units.
There should be a cost free way for K-M to put a price floor on EPB units so that a full fledged panic doesn't develop for this MLP. If reasonable investors believe that K-M will just continue to allow the unit price to fall until, at some point, KMI will be duty bound to its investors to merge the MLP into KMP at a small premium to the then collapsed market price, it could become a race to the bottom if everyone believes that they have to sell now, or sell later at a lower price.
The cost free floor could be a statement that, baring force majure, or a bankruptcy of one to the pipelines, KMI will not merge EPB into KMP in any manner that would result in a reduction in cash distributions to the EPB unit holders.
Ok rrb1981. I see the point you are making about the IDR load, and I am convinced that you are correct. One has to consider the total DCF payout that the MLPs are currently making, and this amount is huge in comparison to the amount of incremental DCF that will be generated from any single new project.
Even though the incremental DCF from a new project would be split 50/50 whether the project is at KMP or EPB, the total IDR payout to the GP when the project is at KMP is much larger than if it were at EPB. The historical IDR load at KMP needed just to maintain the current cash distribution is larger than what EPB would payout if the investment were placed at EPB.
rrb1981, thanks for your work and patience.
That's the 10-K of what date, and on what page are you referring to. I'll never find it if you don't zero me in on the exact paragraph.
I'll never know what you mean by incremental equity financing either. We could just assume for the moment that there is none.
I'd say that your IDR spreadsheet isn't much good if it can't tell you how much of an incremental dollar of cash flow will inure to KMI if the dollar is earned at KMP vs EPB.
My answers are $.55 from KMP and $.70 from EPB, as I calculated above. What are your numbers? Very simple question.
Hopefully, I am not irritating you. I just like to pursue these kind of mental problems, although some might thing that I should solve my own.
Thanks for the reply, Liza. I didn't mean to put you on the spot choosing sides. I just thought I'd try to learn a bit more about this IDR load and greater cost of equity capital for KMP. No one is really interested apparently.
rrb1981, here is my comparison of what happens to an additional dollar of DCF when generated by KMP as compared to when generated by EPB. This takes into account both the IDRs and the distributions to the LP units which KMI owns. KMI owns about 10% of the KMP LP units and about 40% of the EPB LP units. Both MLPs are in the 50/50 splits.
For each new dollar of DCF generated by KMP, $.50 goes to KMI as an incentive distribution. Of the remaining $.50, 10% (5 cents) goes to KMI as an LP distribution. So that's a total of $.55 going to KMI, and the remaining $.45 going to the unrelated LP unit holders.
For each new dollar of DCF generated by EPB, $.50 goes to KMI as an incentive distribution. Of the remaining $.50, 40% (20 cents) goes to KMI as an LP distribution. So that's a total of $.70 going to KMI, and the remaining $.30 going to the unrelated LP unit holders.
So an incremental dollar of DCF is more valuable to KMI when it is generated by EPB than when it is generated by KMP.
But I will wade thru the 10-K and presentations to see if I am missing something.
rrb1981, thanks fro the reply, but I don't agree. I think its only the incremental dollar of distributable cash that matters, and since both KMP and EPB are in the 50/50 splits, KMI will get the same IDR amount from each additional dollar of distributable cash whether it comes from KMP or EPB.
The fact that KMP is paying out half of its distributions as incentive distributions doesn't matter. That's history, and merely statistical. Its what happens to the additional dollar of cash that matters.
But I will keep an open mind on this matter. Perhaps others (Liza, are you reading this?) might chime in. I just like to understand the technicalities of things.
EPB has been described as a "turn around play" lately. EPB doesn't have to be turned around. It has to stay the course. Its market sentiment that has to turn around. No rush as far as I am concerned.
rrb1981, I don't understand your comment about EPB recovering to $33, where you think it belongs. Its at $32.36 now. What difference does $.64 make?