A Big Deal in the Works for Kinder Morgan

On Monday, Kinder Morgan (NYSE: KMI  ) gave a presentation to state officials in Delaware regarding its plan to take over operations at the Port of Wilmington. The state is pondering a public-private lease operating deal with the midstream giant in an effort to secure infrastructure improvements that will keep the port commercially relevant in the coming years . Operating an entire port and making significant upgrades is a big deal, so let's take a closer look.

The deal
Again, this potential deal is only in the negotiating stages right now, and no formal offer has been made. The discussion thus far centers on creating terms for a long-term lease agreement between Kinder Morgan and the Diamond State Port Corp., which is a corporate entity of the state of Delaware. Kinder Morgan, or most likely its asset-holding master limited partnership, Kinder Morgan Energy Partners (NYSE: KMP  ) , would operate, upgrade, and maintain the port, which currently runs an annual deficit of $3 million .

Delaware's General Assembly has a say on the deal before anything becomes official and, given the mounting opposition from companies doing business at the port, as well as concerned citizens, we cannot assume this is already a done deal .

But let's not be naïve. The Port of Wilmington is an important part of Delaware's economy, if improvements are not made, the Port will most likely lose business, as companies begin shipping goods on faster, bigger ships that will not be able to reach Wilmington without what some estimate are more than $300 million in improvements .

Terminals galore
Kinder Morgan knows a thing or two about terminals, and would likely be a good fit here. It's the largest independent terminal operator in the U.S. Its 180-plus terminals range in purpose from liquids storage to handling bulk materials like coal and steel . They are located all over the U.S. and in parts of Canada. Last quarter, the segment generated $198 million in earnings. That result marked a 7% increase year over year, and though that was the smallest growth increase across all of Kinder Morgan's business units, the partnership is looking to bump growth in the segment this year by injecting capital into a few of its existing projects. Recent announcements have included a $112 million expansion at its Edmonton terminal , as well as a $170 million buildout of its Houston Ship Channel terminal network .

Kinder Morgan expects its Terminals segment to yield $1.46 billion in net revenue in 2013. This would mark about a $118 million increase over 2012's number, and would more than double the year-over-year increases of the past. Terminals' revenue has increased by approximately $50 million over the past three years . Make no mistake: Though we hear mostly about its pipelines, terminals are an important part of the Kinder Morgan story.

As far as this specific deal with Delaware goes, Kinder Morgan does actually have some experience operating a port under a public-private lease agreement. Its Vancouver Wharves terminal handles approximately 3 million tons of bulk cargo every year, ranging from minerals to wood pellets to agricultural products. The facility also has ample liquids storage, and connects to three Class 1 railways . Kinder Morgan has invested $145 million in improvements at the port after taking over operations from the British Columbia Rail Corp. in 2007 , making it a very similar situation to what may unfold in Delaware.

Looking ahead
Refurbishing the Port of Wilmington is now more important than ever. Beginning in 2015 , larger ships will sail through the newly expanded Panama canal, headed to and from U.S. ports, among other places. Few East Coast ports can handle these larger ships, which means that the Port of Delaware will not be alone in its upgrades. It also means that any port that does not upgrade will miss out on the new business.

There have also been increasing mentions of repealing the Jones Act -- the legislation that requires American ships and crews to move cargo between American ports -- in the media, coming from journalists, analysts, and industry professionals alike. A repeal of the act would introduce more foreign ships to American ports. Busier ports are great, provided the underlying infrastructure can handle the business.

If this deal goes through, it presents a great opportunity for Kinder Morgan to continue to expand its footprint outside of its traditional energy business -- but not so far outside that investors need to be concerned that the partnership is biting off more than it can chew.

Foolish takeaway
From a forward-looking investment perspective, I like this deal. Kinder Morgan has proven itself adept at managing its terminal business. As the world of maritime trade continues to evolve, increasing exposure to maritime ports makes a lot of sense. Still, we will have to wait and see whether the deal goes through, and if it does, what the exact stipulations are, before we consider this a successful move for Kinder Morgan.

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  • Report this Comment On February 16, 2013, at 9:07 PM, mm5525 wrote:

    Super article. Thanks for your contribution. Did not know this was in the potential works.

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