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November 23, 2010

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Return of KMI: Kinder Morgan Files GP IPO

While the rest of the sector has been zigging, Kinder Morgan is planning to zag.  After a rash of consolidations in the publicly-traded MLP GP subsector in the past year that saw EPE, NRGP, BGH, PVG (pending) and MGG (2009) all get consolidated into their subsidiary MLPs, Kinder Morgan has filed to take its general partner holding company public.  The company filed its S-1 as an LLC, but will convert to a corporation bearing its old name Kinder Morgan Inc, upon consummation of its IPO (presumably it will trade under its old ticker as well – KMI).

All of the consolidation in the GP space, following the explosion of GP IPOs in 2007 and 2008, was based on the desire of each of the subsidiary MLPs to maintain a lower cost of capital and eliminate the distorted payouts that went to the general partner IDRs.  The largest MLP (and KMP’s main rival / comparable), EPD, has been at the forefront of lowering its cost of capital, first lowering its top tier incentive distribution rights split to 25% from 50%, and buying out its GP (EPD wasn’t the first to buy back it’s GP, but it was the largest MLP to do so).  KMP has chosen to keep its top split at 50% and has not chosen to buy back its GP.

At its current annualized distribution of $4.44, KMP pays its general partner (in IDR payments and 2% GP interest) 45% of all distributions, far and away the most in the sector.  Put another way for every $4.44 per unit it distributes to unitholders, KMP distributes an additional $3.61 to the general partner, for a total distribution of $8.05 per unit.  KMP’s general partner was at one point a public company, but in mid- 2007 at the peak of the private equity boom, the company was bought by a consortium of private equity buyers, including Kinder and Morgan (who rolled their KMI equity into the deal).  Note: the transaction was announced in 3Q06, but closed in July 2007.  At KMP’s current distribution run rate, the GP receives $1.1 billion in cash from KMP per year for managing the MLP.

KMP’s GP is owned by some very smart people, and I’m sure this is a move that will maximize their private equity returns from the original buyout, but they could have done something to help the MLP at the same time, perhaps by having the MLP buy out the GP as opposed to taking it public.  The GPs that have been bought out in the past year have not been purchased cheap, KMP’s sponsors still likely would have earned a substantial mutliple of their original investment.   I guess that scenario would have created quite a bit of selling pressure on KMP’s units, but if there was ever an MLP that could withstand some selling pressure, its KMP, which is the most actively traded MLP in existence.  It seems like this new public GP, KMI, will have less trading volume than KMP, and will be more challenged to hold up amidst ongoing sales from these sponsors.

But perhaps the big payout in the IPO is enough to offset any equity overhang or difficulties in selling their remaining stakes.  Time will tell, but on the face of the filing, which can be found at the link below, the IPO potentially could raise as much as $1.5 billion. If all $1.5 billion were raised in a single offering, this would be far and away the largest IPO of an MLP GP ever.  It’s choice to structure as a corporation (as opposed to an MLP or LLC), is likely a result of the sponsors desire to be able to sell this issue to institutions, but the issue of taxing carried interest likely also pushed them towards a corporate structure.

In any event, once this IPO gets done, we’ll be able to point to at least one private equity deal done in 2006/2007 that turned out well…

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